Global rupee allowing rupees to settle foreign trades is a good move it can have long term benefits

Global rupee allowing rupees to settle foreign trades is a good move it can have long term benefits

RBI this week initiated measures to allow rupee settlement of cross-border trade deals. It’s still work-in-progress but the essence is that Indian banks can act as custodians of funds in international transactions settled in rupees. These measures need to be located in the context of the immediate need to cope with developments in the foreign currency market and the long-term opportunities present in the gradual shift in the currency composition of global foreign exchange reserves.

Global commodity prices have dipped since the level witnessed in May. For India, this augurs well. The average price of an Indian basket of crude in July was $106, about 9% below June. However, it has been partially offset by the weakening of the rupee against the dollar on account of global reallocation of capital after prominent central banks started increasing interest rates. Since January, foreign portfolio outflows have crossed $30 billion. In addition to market intervention, RBI adopted other measures to cope with the rupee depreciation. Last week, it liberalised forex inflows. Now, it’s provided a window to settle trades in rupees.

This window serves two purposes. Right now, it helps India grab opportunities such as discounts on Russian oil. For example, India imported $1.3 billion of Russian crude in April, making it the fourth largest source. A year ago, there were no crude imports from Russia. Rupee settlement allows Indian firms to circumvent Western sanctions that bite because of their dominance over the global financial system. Long-term, there are likely to be more opportunities to internationalise the rupee on account of a shift in the composition of global foreign exchange reserves. The US dollar’s hold is slowly receding – it’s about 59% now from a level of 70% two decades ago.

This trend will continue as countries de-risk holdings. To illustrate, the Bank of Israel plans to reallocate a part of its US dollar holdings to currencies of Australia, Canada, China and Japan. India needs to seize the opportunity ahead. GoI now needs to complement the effort initiated by RBI through relevant policy tweaks.