Is currency trading the way to go?

A mix of policy changes and a push for real growth would make the rupee more palatable, something no official circular can achieve writes Shivaji Sarkar

India needs to come up with new ideas to boost the economy – one being rupee-ruble trade with Russia – even as the currency slides below 80 to the dollar. Will former Prime Minister Atal Behari Vajpayee’s dream come true? Would Bangladesh, Sri Lanka, Myanmar and ASEAN accept it as the Reserve Bank paves the way for currency exchange?

These are sweet dreams to allow the rupee to become an international currency thanks to the RBI circular which does not make it convertible. The targets are not easy to achieve when the Rupee continues to fall rapidly, impacting the economic scenario and growth. This may be a boon for exporters, but India is a net importing country, and the overall impact of Rupee depreciation will be very negative for the country.

The fall of the rupee calls for policy changes to strengthen the purchasing capacity of citizens and protect importers.

The Soviet Union had a rupee-ruble trade agreement (the rupee-ruble trade agreement is an alternative payment mechanism to pay dues in rupees instead of dollars or euros} with India. The idea was first conceived in 1953 as part of the Indo-Soviet Trade Agreement, but Russia abandoned it in the 1990s. India renewed offer of Rupee-Ruble Trade Agreement to Russia as the communist country struggles to accept an international sanction following its invasion of Ukraine accept rupee and wants ruble payments, after the Ukrainian war. is that by a conversion into dollars it can pay in ruble.The practice of escrow accounts which existed in Soviet times is less practical for Russia.

Interestingly, Iran accepted payment in rupees in a world of US imposed sanctions. But this was canceled by India under pressure from the United States. Iran can still get away with it provided US sanctions don’t deter it

But neither Bangladesh nor Sri Lanka, despite high trade ties, ever agreed to the exchange. Would Indians accept “taka” from Bangladesh? The rupee is accepted informally in legal or non-border exchanges but Rs taka’ is still not a preference. Enabling provisions aside, Sri Lanka, during its worst crisis, took out a $3 billion foreign currency loan, although much of it could be repaid in the form of oil swaps. and other goods from India.

India believes that being a big country, it would easily accept its offer from smaller neighbors. Sri Lanka fell into the trap of China and today it is spoiling its destiny. Bangladesh, with more than a dozen major projects with Chinese aid, is experiencing domestic discontent. Despite favorable Awami League rule under Sheikh Hasina, sentiments are still less pro-Indian.

However, Myanmar recently agreed to accept the Thai baht in cross-border trade transactions and reportedly plans a similar deal for the Indian rupee aimed at limiting dependence on the US dollar.

The Russian-Ukrainian war led to scarcity, protectionism and a wave of defaults. This has led to weakening global growth, high inflation and uncertainty for India with a myriad of problems like constant trade deficits of $20 billion a month or nearly a year. Foreign exchange reserves have now fallen to $588 billion, as 50% of imports have seen a price spike. Total trade deficits could reach $250 billion.

India’s trade with Gulf countries crossed $175 billion in 2021-22, with much of its oil imports and investments cumulating $16 billion. The Comprehensive Economic Partnership Agreement concluded by India and the United Arab Emirates in February 2022 is expected to facilitate Indian exporters’ access to Arab and African markets in addition to increasing bilateral trade to $100 billion over the next five years. next few years compared to the current one. $60 billion. But the region does not seem willing to trade in the rupee.

RBI’s latest decision is not new. In 2013, the UPA government finalized a list of 23 countries with which India could have traded in “local currencies to save valuable foreign currency and strengthen the rupee.” The list included Angola, Algeria, Nigeria, Oman, Iran, Iraq, Venezuela, Qatar, Yemen and Saudi Arabia. A task force was set up under the then special secretary, Rajiv Kher. The Kher committee in 2014 had discussed two models for settling bilateral trade in local currency – Vostro and Nostro accounts, and the traditional exchange model. He preferred the traditional exchange model.

In 2011, India and Japan agreed a currency swap line limited to $15 billion, a positive move for the struggling Indian rupee, Asia’s worst performing currency that year at Rs 48.24 for a dollar. It was proposed to be increased to $75 billion in 2018 by the NDA government. These are linked to the London interbank rate, called Libor. This meant that a conversion rate was decided and later both countries repaid the amount at the same exchange rate. The fixed amount is held in rupees in a Japanese bank and a similar amount in Japanese yen in an Indian bank to settle trade payments.

Japan has done this with several countries such as China, Malaysia, Singapore, Indonesia and Thailand. Madan Sabnavis, chief economist at CARE Ratings, said such arrangements existed but had never been used. Although this did not impact the market, it did give RBI some leverage.

India’s free trade agreements with ASEAN, Japan and South Korea have not proved favorable for the country as they have led to growing deficits in trade in goods, according to a study published by the Third World Network think tank. just a loss in trading terms, but also has an impact on the value of the rupee. This means that FTAs ​​need to be revised

It is wrong to believe that the rupee is losing only because of the current Ukrainian war. There are many other reasons that need to be investigated in detail. The conditions inherent in the country, the increases in retail prices of 7.1% and wholesale prices of 15.18% (vs. 15.88%), the increase of 32%, in one year, in the prices of basic products and the flight of foreign manufacturers contributed significantly to the crisis. One might wonder why, despite US inflation at 9.1%, dollar values ​​are rising. It is attributed to the US Federal Reserve’s decision to raise real interest rates. It ensures higher returns to the investor. India has not yet developed this intrinsic strength.

Some particular policies also affect India’s economic performance. The fanciful idea of ​​throwing cars away every year does not increase the value of the rupee. Forcing people to throw Rs at work’ Euro IV and VI cars are hitting people below the belt. Another 9.5 lakh diesel car is to be forcibly scrapped this year for alleged air quality improvement. Irrespective of international pressure, India needs to apply fewer cosmetics and do more to empower the people.

It must be remembered that the construction of each new car will require new components that will have to be imported. This will lead to further erosion in the value of currencies. Of course, every new car will also have an impact on air quality, even if in a small way. The UPA rule brought this draconian provision to the National Green Tribunal. Prime Minister Narendra Modi should personally intervene to remove it.

A mix of policy changes and real growth incentives would make the rupee more palatable, something no official circular can achieve

(The writer is a regular columnist for The Pioneer)

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