The Reserve Bank of India has taken a decision to allow invoicing and payments for international trade with rupees instead of dollars. Why has the RBI taken this decision and whether Rupee exchange in the International Trade is sustainable? Whether our country is shrinking the Forex Reserves and whether the value of the Rupee is under control are the questions that are arising in the minds of the people.
Recently, our country facilitated oil imports from Russia resulting in stronger bilateral trade when sanctions against Russia had been imposed by the US and many European countries. It created hardships in cross border payments due to cut off in the payment system. Apart from this, it created promotion of our products for exports and created a positive atmosphere among the global business entities about the rupee. After careful examination of Sri Lanka’s financial crisis as a case study, forex reserves for balance of payments are crucial for any country for smooth functioning of their economy. When Rajapaksa was elected as President for this term, Sri Lanka had 7. 50 billion USD forex reserves in hand. But, today’s forex reserves are available for 50 million US Dollars. Apart from the fact that there was huge budgetary allocations with the Rajapaksa’s family, corrupt practices and misgovernance deteriorated the forex reserves causing default in payment of external debt to the extent of USD 51 billions and immediately payable USD 7 billions. Keeping in view the Sri Lankan crisis, many experts have alerted our country about external debts for $620.7 billion with their apprehensions about huge Foreign Capital Outflow due to global economic uncertainty, rise in inflation and rupee depreciation to dollar.
RBI has announced a mechanism to settle international payments with Rupees in trade with countries that express their interest to settle their payments. It means that exporters receive their money in rupees at the exchange rate on the date of the transaction and similarly, importers get money in Rupee on the day of exchange rate of the transaction
The Union Government had clarified that out of external debt of $620.7 billion, the Government’s share was $130.80 billion. It included Special Drawing Right Allocations, which means 21 per cent of the total external debts was the share of the Union Government’s liability. There is Goebbels propaganda about the debt burden of our country going out of control since external debt repayment is due for $267 billion within a year. But 40 per cent of those debts are pertaining to the corporations like NHAI which have their own source of revenues as well as monetary assets. Hence, repayment will not be a burden on our country. Further, the Centre’s share is only 3 per cent in $267 billion of external debt which is less than $ 8 billion and is conveniently manageable without any risk. Here, the risk is much pertinent to the off-budget borrowings of States like Andhra Pradesh without proper monitisable Capital Assets. Many analysts and people have been worried about forex reserves for future external debt repayments and rupee depreciation in its value.
The existing forex reserves available in our country for $601.057 billion as on July 10th 2022 though forex reserves dipped for two consecutive weeks, still our country holds the position of 5th rank in the world in Forex Reserves. Further, the worrying factor is the Rupee value depreciation to US Dollar and the Rupee hitting Rs.80 per US Dollar. But, we need to observe all major countries’ currencies depreciating their values with the dollar. But, interestingly our rupee has been appreciated with other currencies, other than dollar currency exchange parity has been favoured to our country.
Let us examine other major currencies vis a vis dollars. One Euro has become equivalent to one US Dollar and if we go back, as on January 6th, one USD was exchanged at 0.8102 Euro. Whereas Euro value had been stronger than US Dollar prior to COVID-19 and its value eroded due to Russia’s war with Ukraine in addition to post pandemic economic uncertainty in Europe and other parts of the world. It is important to note that Germany is the biggest player in the European Union’s economy, which registered a trade deficit for the first time since 1991. Interestingly, our country’s Rupee value appreciated against the Euro since the beginning of 2022 as One Euro was equivalent to Rs.90 in the beginning, but it is around Rs. 80 now. It should be noticed by everyone that Rupee has done well against Dollar than Euro due to RBI’s intervention to stabilise the rupee. Similarly for all major currencies like Japan Yen, One USD was equivalent to 108.94 JPY as on December 7th, 2021, it is 138.55 JPY as on July 15th, 2022. One JPY was equivalent to 0.66 Rupee as on December 31st, 2021 and it was 0.58 JPY as on July 15th, 2022. In addition to this, one Swiss Francs (CHF ) was equivalent to 1.096 US Dollars as on December 31st, 2021 and it is 1.013 USD now. But, in the case of Our Rupee, One Rupee was equivalent to 0.0123 Swiss Francs (CHF ) as on December 2nd, 2021 and it is 0.12 Swiss Francs (CHF ). Hence, our Rupee though depreciated with the value of the Dollar, in contrast Rupee has been appreciating with other currencies due to remedial measures taken by the RBI on time.
It needs to be observed that 85 per cent of our fuel requirements are imported by us and it should be paid in US Dollars. This resulted in sharp rise in the imported fuel prices, coal imports and rise in other imports causing a trade deficit for $26.18 billion in June though exports growth had registered 23 per cent as against the rise in imports by 55 per cent over the same period in the last year. Though both exports and imports have been raised significantly, imports are high due to the requirements for latest industrial growth noted as 19.6 per cent year on year, Bank Credit raised at 13.2 per cent PMI for services registered at 59.2 and Both Direct and Indirect Tax revenues. The fact is that the imported inflation from energy prices and oil import dependence, there is little India can do about this in the short term beyond some domestic adjustments (say cutting taxes at the margin) but all such measures have a price. These are all issues that may influence the forex reserves to clear the payments in the International markets with US Dollars.
Astonishingly, though US inflation touches 40 years high at 9.1 per cent like many major economies are facing the similar problem, still US Dollar value has been appreciated across the globe due to demand for US Dollars for settlement of international payments across the globe. Importantly, UN had noticed impact of Russia and Ukraine war on 107 countries around the world, which faces one of the following three problems or more as 1) Raising Food Prices, 2) Raising Energy Prices and 3) Tougher Financial conditions in the month of March, 2022, of which 69 countries face all three risks like Sri Lanka and many developing economies like Egypt, Tunisia, Lebanon, Peru, Argentina, Ghana, Ethiopia, Kenya, South Africa etc will not able to service their debts in next 12 months. As far as India is concerned, few States like Andhra Pradesh, Punjab, West Bengal, and so on are inching towards debt crisis. In this situation, RBI has announced a mechanism to settle international payments with Rupees in trade with countries that express their interest to settle their payments. It means that exporters receive their money in rupees at the exchange rate on the date of the transaction and similarly, importers get money in Rupee on the day of exchange rate of the transaction. In this process, both the countries express the interest in Rupee trade, both the countries open specified bank accounts in each other, and both the countries maintain reserves in local currency. Consequently, foreign countries pay in their local currency and payments deposited in their Indian Bank accounts. Payments calculated in Rupee based on market rates and bankers pay Indian traders in Rupee.
It is advantageous to India as dollars will be maintained as Forex Reserves in a healthy manner by increasing the demand for Rupee in the international market to create more demand for Rupee, which will strengthen the Rupee. Easier trade between the both agreed countries without US Dollars. Three advantages ahead with International Rupee transactions, Lower Trade Deficit, Value appreciation for Rupee and Sustainable Forex Reserves.