Asian countries in talks for settling trade in domestic currencies

Countries to accept trading partners' currency; move aimed at reducing dollar dependence

The Reserve Bank of India’s (RBI’s) latest move allowing international trade settlement in rupees comes at a time when several Asian economies such as the United Arab Emirates, Indonesia, Sri Lanka, Myanmar, and India are in talks with each other to settle trade in their domestic currencies.

Sources in the central bank told Business Standard that discussions among these countries were on, and that the measures announced by the RBI on Monday were the first steps in that direction. “The next step is settling trade transactions in bilateral currencies. Both countries will accept each other’s currency,” said a source. “China is already trading with Russia without dollars,” the source added.

On Monday, the RBI put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in rupees.

A key factor behind the decision to cut dependence on US dollar-denominated transactions was the outbreak of the Russia-Ukraine conflict, which resulted in widespread sanctions on Moscow by western powers, the sources said.

Several Russian banks have also been excluded from the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

While the war in Ukraine and the Western response may have quickened the process, there were increasing signs of a challenge to the hegemony of the dollar as the universal trade currency. An International Monetary Fund (IMF) blog published last month said central banks were no longer holding the greenback in their reserves to the earlier extent. The dollar’s share in global foreign exchange reserves fell below 59 per cent in the fourth quarter of last year, extending a two-decade decline, according to the IMF’s currency composition of official foreign exchange reserves data, the blog read.

Analysts said the central bank’s measures were likely aimed at facilitating smoother transactions with Russia, which accounts for over 10 per cent of India’s crude oil imports.

With the safe-haven US dollar globally strengthening to 20-year highs because of risk aversion worldwide, countries such as India, which are heavily dependent on overseas fuel purchases, have faced considerable pressure on their import bills.

Commodities such as crude oil are denominated in the US dollar, which is the world’s reserve currency. The RBI’s move essentially implies that the countries that are counterparties to a transaction would be taking on exchange rate risk on the rupee rather than the US dollar.

“If India does start to convert trade with Russia under this route, it can potentially pay for a chunk of its oil imports in INR… This would ease India’s hard currency outflow substantially,” said Ananth Narayan, associate professor at the S P Jain Institute of Management and Research and senior India analyst at Observatory Group.

At the current exchange rate, one Russian ruble equals 1.35 rupees. The rupee on Tuesday hit a new low of 79.66 per dollar.

“(India’s) trade deficit comes down by around $5 billion. Earlier, the share of Russia in Indian oil imports was around 0.5 per cent, but now it’s gone to 10 per cent. That’s around $18 billion (of imports), which is 30 per cent cheaper,” Abhishek Goenka, founder and CEO, IFA Global, said.

India has in the past employed bilateral transactions in currencies outside the US dollar with countries such as Iran, which was also hit with sanctions from Washington. However, with the RBI’s push for rupee settlements occurring at a time of heightened global economic and political volatility, analysts feel that the rupee could now gain a much greater degree of international acceptance than it had previously.

The rupee has depreciated around 6.6 per cent versus the dollar so far in 2022, but the volatility in the domestic exchange rate has been far lower than that experienced during previous episodes of turbulence such as the Taper Tantrum of 2013 or the Global Financial Crisis of 2008.

“Basically, the message is that if you want to sanction a country and stop business with a country, other countries which are doing business with that country should not suffer,” Goenka said. “That’s India’s communication to the US, indirectly: if there is some country which is out of the SWIFT network, let’s settle in INR.”

Gaining currency

• India, UAE, Indonesia, Sri Lanka, and Myanmar among Asian countries in talks to settle trade in domestic currencies

• RBI has allowed international trade settlement with some countries in rupees

• Next step could be bilateral currency trade between countries

• Aim is to lower dependence on dollar trade in the wake of western sanctions on Russia