Does shift to rupee signal dollar retreat?

With US sanctions destroying the unified monetary system, new bilateral arrangements will emerge. A few neighbouring countries seem interested in India’s initiative.
Express Illustrations | Soumyadip Sinha
Express Illustrations | Soumyadip Sinha

On the 11th of this month, the Reserve Bank of India (RBI) issued a circular to banks authorised to deal in foreign exchange, informing them of the change in payment procedure for cross-border trade. The language adopted was rather coy. The idea, it went on to say, is “to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR”.

The circular allows payment in INR and details the arrangements for invoicing and settlements for imports. It falls back on the Foreign Exchange Management (Deposit) Regulations, 2016. Banks may open Nostro/Vostro accounts on behalf of traders to facilitate cross-border payments, which will be in rupee.

Shorn of the RBI’s jargon, the change implies bringing back the bilateral rupee payment arrangements in vogue with the East European countries. Indeed, the unstated intention is to circumvent the ban (sanctions) on dealing in dollars the US imposed on Russia in the wake of the war in Ukraine. A significant aspect of the new arrangement is that all payments, invoices, and settlements shall take place in INR. Another is that it covers all trade, including crude oil and gas. It is worth recalling that oil supplies were paid in convertible currency, i.e., the dollar, under the old bilateral arrangement.

When the changed payment procedure was announced, all the newspapers and the media carried exciting reports proclaiming it as a paradigm shift and that the rupee was being launched as an international currency and the RBI had commenced the process. The reportage was either a misunderstanding or inspired briefing by our diplomatic corps to mollify the US’ sensitivities. The diplomatic niceties must be forsaken when national interests are at stake. Indeed, Oil supplies from Russia are one such. India seems to have taken the plunge after dithering for some months. This move was also seen to be in line with our foreign policy and voting in the UNGA.

As we wrote in an earlier column (Ukraine invasion: Sanctions are not forever, 3rd March 2022), there are profound implications such as the disruption of supply chains impacting areas like energy, etc. The immediate problem is to settle a bilateral arrangement. Arindam Bagchi, the spokesperson of MEA, said there was a lack of clarity and details were awaited. He did say that the Rupee/Rouble model was one of the options to be examined even as he ducked the question. Finally, after a couple of months, the GOI/RBI has opted for a bilateral arrangement.

As we hinted earlier, the story about the internationalisation of INR is a diplomatic sop to the US. If we study the monetary policy of the RBI closely over the years, making the INR a global currency was not one of its policies, unlike the Peoples’ Bank of China (PBoC), which worked for years to make its RMB a global currency. The RBI had done some Staff Papers on the issue that neither the global value, use of INR, nor the share of India’s trade in international trade would make INR an eligible candidate. Moreover, they felt India’s financial market lacked the depth to play a global role.

A brief study in the RBI’s Report on Currency and Finance for 2020-21 was released in February last week. While the Report said that the internationalisation of the rupee is “inevitable” but will complicate the formulation of the monetary policy.

Internationalisation means the currency can be used by both residents and as a reserve currency. The Report pointed out that internationalisation can potentially affect the ability of the central bank to control the money supply and interest rates per domestic macroeconomic conditions. Against such a perception, will the RBI launch INR as a global currency?

There was no reason for the GOI or the RBI to be coy about alternative arrangements to ensure vital supplies. Jim O’Neill posed the question: What do the sanctions mean for future monetary affairs and systems?

Are we witnessing a further consolidation of US power through a dollar-denominated system, or will this episode set the stage for the kind of economic and financial fragmentation? At least for the present, it seems that US sanctions have destroyed the unified monetary system, and it will result in the Balkanisation of the financial system.

In the early round, bilateral arrangements will emerge. India’s initiative has already triggered interest in some neighbouring countries. Yuan will be strengthened, which is already being used in some countries. For the oil trade, Yuan is already adopted. It is too early to foresee the emergence of new trading arrangements. One thing seems evident: the dollar would have lost pre-eminence, and there is a retreat from the dollar. India’s new bilateral arrangement signifies it.

Kandaswami Subramanian

Served in the Ministry of Finance, GOI, and retired as Joint Secretary


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