It is commonly known that the dollar, the pound, the euro, and the yen dominate the world’s trade invoicing currencies. Regardless of origin and destination, exports and imports of nations frequently use these currencies, with the US dollar leading the pack. Thus, there is a large imbalance in international commerce, as exporting and importing nations frequently invoice their transactions in different currencies than the vehicle currency.

WHAT DO WE KNOW?

The Reserve Bank of India’s circular from July 11, 2022, received a lot of attention in this context. The Foreign Exchange Management Act (FEMA) 1999 was amended by the notice, “International Commerce Settlement in Indian Rupees (INR),” to permit cross-border trade in Indian currency. In accordance with this agreement, the RBI establishes the regulations that permit Indian exports and imports to be priced in INR and denominated using market-decided bilateral exchange rates. The amendment focused on invoicing, exchange rate and settlement. The trade flows under the arrangement will be invoiced, denominated and settled in Rupee (INR). The bilateral trade rate of exchange will be determined by the market forces.
Under the guidelines by India’s RBI AD banks are now able to set up Rupee Vostro Accounts. AD (authorised dealer) Bank in India may open Special Rupee Vostro Accounts of correspondent bank(s) of the partner trading country to settle trade transactions with any country. In order to make it possible for this arrangement to be used to settle international trade transactions. It is decided by the central bank that when using this system, Indian importers must pay bills for the supply of goods or services from an overseas seller or supplier in INR, which must be credited into the Special Vostro account of the correspondent bank of the partner nation. Indian exporters who use this technique to export products and services will get payment in INR from the remaining balances in the specified Special Vostro account of the correspondent bank of the foreign partner.

It was being further decided that the surplus rupees balances may be utilised for mutually decided transactions related to capital and current accounts. The surplus of such special vostro accounts can be channelised for Advance flow management for export/import, payments for investments and projects Investment in government securities, such as Treasury Bills.

Under the general guidelines of Uniform Customs and Practice for Documentary Credits and Incoterms, banks of the partner trading nations may jointly decide on the letter of credit and other trade-related paperwork. The banks of the partner nations may mutually decide to exchange communications in a safe, secure, and effective manner, the RBI stated.
Through the aforementioned rupee payment method, Indian exporters may get advance payments in Indian rupee from foreign importers against shipments. Indian banks must make sure that any available funds in these accounts are utilised to fulfil payment commitments resulting from already-fulfilled export orders or future export payments before permitting any such advance payment against exports to be received, the central bank stated.

RBI’s circular stated that the ability to make or receive payment of the remaining export receivables or import payables, if any, using the rupee payment mechanism, along with the ability to set off export receivables against import payables for the same foreign buyer and supplier, may be authorised.

With a focus on Indian exports, the RBI had instructed banks to make further preparations for trade flows to be invoiced, paid for, and settled in rupees. This was done to promote the growing interest of the international trading community in the local currency. Many experts see this move by the RBI as an early step towards Internalisation of rupees. Former RBI Executive Director G Padmanabhan remarked, “For internationalisation, one of the things must happen is that the currency becomes utilised for commercial transactions progressively.” He was speaking at an event hosted by the IMC Chamber of Commerce and Industry.

INR’s INTERNATIONALISATION IS INEVITABLE

Estimates indicate that the dollar’s proportion of international invoices is around 3.1 times that of global exports. Have recent geopolitical circumstances pushed the RBI to introduce trading in rupees given the hegemony of the dollar in global trade? Widespread restrictions on Russia’s central bank and its foreign economic activities have resulted from the war between Russia and Ukraine. Also prohibited from using the Swift financial communications system are a number of Russian institutions. While the US dollar is strengthening and oil prices are rising, India, a major oil-importing nation, is also dealing with a large outflow of foreign capital.

In this regard, commerce in rupees has the potential to benefit both India and Russia, since India will be able to acquire cheaper Russian oil while perhaps avoiding some of the constraints of the Western financial systems. As a result, Russia will be able to buy several important products from India, including medicines. Exporters from India and Russia will profit from easier access to markets in the partner nation. With a few other nations, like Iran, that maybe do not wish to use reserve currencies like the USD in international commerce, similar mutual benefits might also be explored.
Of course, neither Russia nor oil are mentioned specifically in the RBI’s rupee-invoice trading agreement. A framework of international trade in rupees can be helpful for these nations as well, as several in South Asia are dealing with financial issues and foreign exchange restrictions. India has promised Sri Lanka a credit line worth a few billion dollars as an example.

In the medium to long term, this may enable India to get a little closer to abandoning the use of a vehicle currency in regional commerce. This might pave the way for the establishment of a South Asian currency bloc dominated by the rupee with the proper type of logistics and political support. Regionalizing the rupee can be a step toward internationalisation, even if it is now well beyond what can be accomplished in the near future.

There are challenges, though. There may be some unease among US politicians about nations turning away from trading using dollar invoices and circumventing its sanctions against Russia and other nations. According to reports, Russia is requiring more and more transactions to be conducted in dirhams. As a result, the final outcome will be political and diplomatic. These actions might address both urgent concerns and strategic issues, though India will need to proceed cautiously.

JUST ONE ANOTHER BRICK IN THE WALL

This is not the first step, in fact. If anything, India has been steadily making strides over the past ten years to integrate the Indian rupee into the vocabulary of international commerce, much like other hard currencies like the Swiss Franc, Japanese Yen, British Pound, and so on. What has been missed by disregarding history is the fact that RBI’s move is not arbitrary. It is not a final action either. It is a component of a calculated series of actions that have been implemented over the past ten years and beyond with the aim of testing the global waters and preparing the Indian economy for a globalised rupee.

The 2008 global financial crisis, which was brought on by the default of high-risk subprime bonds, served as the catalyst for this reassessment. The ensuing global financial crisis revealed how susceptible certain nations are to the whims of a commerce that is mostly conducted in dollars. China introduced the Renminbi as a substitute currency at that point because it had grown powerful enough to threaten US hegemony.

THE UNFINISHED BUSINESS BEFORE US

Far from internationalising the currency, rupee invoicing. To achieve capital account convertibility, the latter would need major efforts. In addition to holding the rupee as a reserve currency, it would require third nations’ willingness to settle payments, conduct business, and trade in rupees. Third nations would also need to be willing to make payments, conduct business, and engage in trade in rupees in addition to keeping the rupee as a reserve currency. The rupee then has to be considerably more stable than it is right now. For the purchase and selling of rupees by any firm, whether onshore or offshore, it would require unrestricted access.

Foreigners’ preparedness and competence to invoice in rupees is just one modest step along a lengthy road. Internationalization will undoubtedly aid in lowering transaction costs for international commerce and lowering exchange risk, but it will also result in domestic monetary policy having less independence. Because of India’s existing budget deficit, inflation, and currency instability, internationalisation of the rupee is not a certain conclusion and may perhaps be a bridge too far. However, rupee invoicing provides a much-needed boost for commerce between India and Russia and will also relieve some devaluation pressure.

In the end, it is obvious that India is making modest but steady progress toward a global rupee. This determination was only confirmed when the RBI decided to permit rupee invoicing.