Trade: Many countries ready to use Indian rupee, says Goyal

Virendra Pandit

New Delhi: A day after India inked the free trade pact with four EFTA countries–Switzerland, Norway, Iceland and Liechtenstein–that would potentially attract USD 100 billion in investments in the next five years, Union Commerce and Industry Minister Piyush Goyal said on Monday many developed and developing countries are keen to start trade in rupee with India to cut transaction costs for businesses.

These countries include Bangladesh, Sri Lanka, and nations of the Gulf region, he said, expressing confidence that the development will be a “very game-changing” dimension to India’s international trade.

“Bangladesh and Sri Lanka are already talking to us and they want us to start this immediately. Other countries in the Gulf region are also looking at that. I think it’ll take some time for people to see the benefits. And then we’ll have more and more developed countries and nations in the Far East also joining the bandwagon. Singapore is already on board to some extent,” he said.

Gradually, these countries are realizing that undertaking trade in domestic currencies has several advantages. It is now picking up traction and a lot of countries have come forward for this arrangement. They are talking to India about that as they would also like to initiate direct transactions between their local currency and the Indian rupee.

“Slowly, the conscience is setting in that rather than converting all the transactions into a third currency, both ways, add significantly to transaction costs,” Goyal told a news outlet.

Trading in other currencies leads to foreign exchange and transaction losses as there is a cost for conversion. The delays in the movement of money also push up transactors’ costs.

“We started with the UAE, which became one of the first countries to accept this. It’s now picking up traction. We get a lot of countries who come and talk to us that they would like to also initiate direct transactions between the local currency and the Indian rupee.

“This process takes time. It involves the central bankers of both nations concerned to create the framework and then it evolves acceptance by importers and exporters,” Goyal said, adding “When it will take off, it’ll just fly.”

The engagement is also beneficial as the Indian rupee is mostly stable against most of the international currencies and, according to experts, this is one of the reasons that different nations today want to have trade relations built on rupee trade, which is also helping many countries having dollar shortages.

India has started trade in the rupee with neighboring countries, including Nepal and Bhutan. The rupee trade mechanism has been initiated to facilitate trade in national currency with Russia, while Sri Lanka has included the Indian rupee in its list of designated foreign currencies.

India’s first-ever payment in rupees for crude oil purchased was from the UAE and that is helping the world’s third-largest energy consumer to push for taking the local currency global, as it looks for similar deals with other suppliers.

Changes have been made in the Foreign Trade Policy (FTP) to allow international trade settlement in Indian Rupee with a view to making INR a global currency.

In July 2022, the Reserve Bank of India (RBI) decided to allow the settlement of India’s international trade in rupee. Accordingly, authorized Indian banks are permitted to open and maintain special rupee Vostro accounts of the partner trading country’s banks.

These accounts keep the foreign bank’s holdings in the Indian counterpart in rupees. When an Indian trader wants to make a payment to a foreign trader in rupees, the amount will be credited to this Vostro account.

Similarly, in the reverse scenario, the amount to be paid to an Indian trader is deducted from the Vostro account, and credited to the person’s regular account.

Several banks, including HDFC Bank and UCO Bank, have opened special Vostro accounts to facilitate overseas trade in the rupee and many countries have expressed interest in having this arrangement for the local currency trade.