The Russia-Ukraine war and unbridled note printing by the US Federal Reserve have accelerated the move to diversify international trade settlements away from the US dollar towards bilateral trade in local currencies. India is not an exception to this. But the major impediment to settling India’s global trade in rupees has been the trade deficits it runs with most countries.

Trading partners were thus far reluctant to hold large quantities of rupees which had limited avenues for deployment. But as recently reported by this newspaper, Russia — which had been accepting the rupee for its trade with India over the last two years — has managed to use most of the rupee balance estimated at about $8 billion, lying in special rupee vostro accounts with Indian banks. Not only does this help diversify away from the dollar, it boosts the rupee’s position internationally too. Russia has reportedly used the rupees held by it to pay for imports from India, invest in infrastructure projects, in equity markets and for purchase of government securities. Both governments seem to have worked together to identify projects, such as the joint venture to make and maintain 120 trains for Indian Railways or the prospective deal to build 24 cargo ships in Goa shipyard for operating in the Caspian Sea. India and Indonesia may soon have real-time settlement and trading in local currencies. Besides settlement in local currencies, India is also trying to develop an alternative channel for sending messages regarding these bilateral transactions, in a bid to reduce dependence on the SWIFT messaging system.

It is just as well that the Reserve Bank of India provided an additional facility in July 2022 to settle all international trade-related transactions in Indian rupees. While the facility to settle trade through other hard currencies existed earlier, this dispensation has paved the way for the rupee to increase its presence in international trade. There is no doubt that the dollar still rules firm over international forex transactions with 90 per cent share (less so in reserves), but the rupee has been slowly increasing its share, now at two per cent. With RBI giving approval to banks from 18 countries to open such special rupee vostro accounts, including Germany, Mauritius, Singapore, Sri Lanka and United Kingdom, such trades could increase going forward.

That said, it should be pointed out that the journey to diversify away from the dollar is at a nascent stage. Inking bilateral pacts, or executing them the way India and Russia have done may be easier when the importing or exporting entities are controlled by the government. Private enterprises could be reluctant to accept rupees. It should be the endeavour of the government to create avenues where the rupees in the vostro accounts can be gainfully deployed. That can help bring private enterprises on board.