India’s exports to Russia in the April-December period of 2023 was $ 3.1 billion. This may not look like a big number, but the perspective changes when you see that the exports were up 41 per cent over the corresponding period of the previous year. The jump is attributed to the new mechanism of trade settlement in rupees.

Going by this experience, it is tempting to think that India’s efforts towards internationalizing the rupee will prove to be substantially beneficial.

Ever since the Reserve Bank of India brought out the circular on ‘International Trade Settlement in Indian Rupees’ on July 11, 2022, the arrangement has got off to a good start —as illustrated by the experience with Russia.

Things have moved on quite fast since then. Look at the developments:

Since the circular, India is said to have settled $2.5 billion worth of trade, in rupees.

Before July 2022, India’s trade in rupee was limited to Nepal and Bhutan only. In December 2022, India reportedly saw its first settlement of foreign trade in rupee with Russia.

In March 2023, the RBI put in place the mechanism for rupee trade settlement with as many as 18 countries.

Banks from these 18 countries — Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom have been allowed to open Special Vostro Rupee Accounts (a foreign bank’s account in an Indian bank) for settling payments in Indian Rupees.

Vostro accounts

As many as 106 Special Rupee Vostro Accounts (SRVA) have so far been opened by banks from 22 countries in Indian banks.

As part of its Foreign Trade Policy 2023, the government announced the extension of Foreign Trade Policy benefits for rupee realizations through special Vostro accounts set up as per RBI circular issued on July 11, 2022. This meant that exporters and importers would receive all the benefits provided by the government under foreign trade policy for using rupees in international trade settlement.

In April 2023, India and Malaysia agreed to settle trade in Indian rupees. Sri Lanka has since included Indian rupee in its list of designated foreign currencies. A new mechanism was launched in July 2023 with Bangladesh to settle trade in Indian rupees. The Engineering Export Promotion Council describes this as “very big positive move”, as Bangladesh is one of the topmost destinations for Indian shipments.

In July 2023, during Prime Minister Narendra Modi’s visit to the UAE both countries signed a Memorandum of Understanding to establish a Local Currency Settlement System. The system is meant to cover all current account transactions and permit capital account transactions.

It will also allow importers to pay in their local currency and lead to development of the Indian Rupee (INR)-United Arab Emirati Dirham (AED) market. In December 2023, India made its first-ever payment in rupees for crude oil purchased from UAE, signalling what could be a strategic push to promote the local currency globally.

Talks have also started with another important trading partner Saudi Arabia for shifting trade to local currencies.

India and Myanmar are in talks to settle bilateral trade in local currencies and considerable progress has been made from both sides. Egypt has shown keen interest in rupee settlement; an agreement is in the offing.

To do better

So, things have moved on satisfactorily. Experts have pegged the near-term potential of rupee denominated trade at $8-10 billion, but raising the trajectory higher is fraught with challenges.

First, the rupee is not fully convertible, so countries may hesitate to hold rupee balances. India’s trade imbalance with major partners may also dampen the zest for rupee-denominated trade — India should strive for a more balanced trade relationship.

Further, there will be some domestic challenges. The more globalized the rupee is, the more it would become vulnerable to external shocks in terms of commodity price fluctuations or global interest rates. In such a scenario, it would be difficult for the RBI to ensure exchange rate stability.

The general feeling among exporters is that international trade settlements in Indian rupees will happen surely and steadily, but perhaps slowly. Geo-political crises and sanctions have brought the scope for India to raise the importance of its currency in global trade.

While India’s remarkable comeback from the pandemic raised the confidence of its partner countries on the capability and intention of the incumbent government to take India to the next stage of economic development, the need for a suitable substitution of US dollar by the leading non-US investors also points towards rupee as a suitable alternative — as reflected by more and more countries joining India for rupee trade.