Economic realities hit rupee trade plans
Amid contrasting reports on the fate of Indo-Russian talks for settling trade between the two countries in local currency, the one thing which comes out is that Russia is not interested in doing business in the rupee. The government, it seems, is only putting on a brave face as its efforts to make the rupee an internationally accepted currency face a trade brick wall. It needs to face reality and reduce the buzz it created around the rupee going international.
The rupee-rouble trade talks began with fanfare last year amid the Russia-Ukraine conflict and Russia’s need to bypass Western economic sanctions. India offered help, considering its interest in getting cheaper oil from Russia. Talks began over facilitating India’s large purchases of Russian oil in the rupee. The deal was to let Russia maintain Vostro accounts in India to hold the local currency here and use it for purchases from India. However, the economic realities ruined all plans. With Indian exports to Russia minuscule compared to India’s imports from that country, Russia would always have a surplus rupee balance. And Russia started developing cold feet without a clear idea of how to liquidate the rupee balance. Russia already had an experience in the 1990s, when after the collapse of the USSR (with whom India had rupee-rouble trade deals), and both countries shifted to trade in dollars and other currencies, Russia was left with a huge rupee balance. That took years to liquidate. It does not want a repeat of the situation. Besides, with the rate differential on Russian crude slowly reducing, Russia may cease to remain a preferred trading partner, requiring either of the countries to use an alternative payment mechanism.
This leaves the government with egg on its face, given the brouhaha it created over making the rupee an international currency. Recently, this newspaper argued that India’s plan belies economic and geopolitical realities. Around 86% of India’s imports are invoiced in dollars, while the rupee’s daily average share in the foreign exchange market is just 1.6% of the global turnover (compared to the USD’s 88%). Also, with no full capital account convertibility, the rupee cannot be freely exchanged with other foreign currencies. Given these realities, the government should lower its pitch on making the rupee an international currency.