Trade deals in rupees and the roll out of e-rupee marks a milestone as India prepares to become the third largest economy, surpassing Germany.
By KA Badarinath
Two significant developments this week have made the trajectory on Indian rupee very clear. One, Indian government’s fancy idea of taking the modest rupee global has taken wings. And, there’s a definitive movement forward on digitising the rupee after having rejected calls for legalising private crypto-currencies.
Both these movements point to the ambition and forward-looking policy stance of the Indian government and Reserve Bank of India if one were to gauge the implications.
First things first, how does one make the Indian rupee a global currency to reckon with after the Chinese Yuan or Renminbi, that has emerged as the fifth largest trading currency in the last few years? Some baby steps seem to have been taken with regards to the rupee, though naysayers think that it’s more of positioning the Indian currency by the ultra-patriotic Narendra Modi government and Hindutva forces.
Using bespoke accounts to expand international trade and settle export import deals on rupee terms is a good beginning to internationalise the Indian currency. By-passing the dollar, euro, yuan or pound sterling denominated trades is no doubt the first step. The advantage in settling trade deals against rupee is many folds. Apart from internationalising the rupee, Indian payment systems and gateways get popularised across trading and the currency community.
Secondly, volatility in global currencies that hitherto rummaged our trading community and foreign exchange traders catering to a large community of Indian students and travellers may now have limited impact once the deals are squared in rupees.
For now, countries like Zimbabwe, Malawi, Djibouti, Ethiopia, Sudan, Madagascar, Kenya, Namibia and Bangladesh may be willing to do rupee-denominated trade deals. Current volumes and value of trade with these countries may be very insignificant. But, with big players joining the bandwagon, the Indian rupee is bound to get the foothold it’s looking for in the global currency and trade markets.
With over $ 800 billion merchandise trade clocked annually, there may be no reason why India should not have a say in determining payment terms. An equivalent value in services trade or more should add muscle to Indian negotiators seeking to make rupee settlements.
While non-oil trade products and service deals may take a while to settle in rupees, oil and natural gas deals should be done in rupees. Given that Russia has emerged as the biggest supplier of oil after Iraq, Saudi Arabia, UAE and the USA in that order, negotiation with Moscow on rupee-denominated payment terms should actually be pushed for. Moreover, both India and Russia have a long history of clinching oil deals in rupee – roubles during the protracted cold war era.
With Iraq, UAE and Saudi Arabia, there’s no limitation on India attempting to settle oil and gas deals bypassing the US dollar or the euro. In the non-oil trade, small and medium ticket deals with a dozen countries can still be targeted. Chinese President Xi Jinping may be more than willing to do a Yuan – rupee designated deals, thereby disrupting the virtual monopoly of US dollar and euro-denominated deals. Given that India continues to be a big customer for China, a non-dollar deal should still be okay irrespective of the geo-political tensions and border disputes between the two countries.
Gold imports are something that should move to rupee-denominated settlements. With India being the largest consumer of gold at about 1050 – 1200 tonnes annually, valued at about $ 55 – 60 billion, New Delhi should begin the rupee pitch on the bullion market. Gold is the second largest import item after oil and natural gas imports that range between $ 100 – 120 billion yearly.
The second big development is the modest rupee going digital on pilot basis that kicked off the last few days beginning with government securities. This is a definitive milestone in India’s banking history that goes beyond the British imperialist era. Rejection of cryptos as decentralised, speculative and block-chain based currency in India was a difficult step but the right one.
Having rejected private crypto currencies for commercial transactions, recognition as an asset and banks’ collateral, India’s foray into digital space through the rupee monitored and regulated by the RBI marks a new beginning for the world’s fourth largest economy.
As India prepares to surpass Germany and emerge as the third biggest economy internationally, the phased roll out of e-rupee was the most desirable and sustainable option that the Modi government and RBI have taken recourse to. This is in contrast with countries like Hong Kong that legalised crypto-currencies and El Salvador, that set up a dedicated cryto-currency city.
The Central Bank Digital Currency (CBDC) or e-rupee has nothing to do or in common with private crypto-currencies. E-rupee is equivalent in value and acceptable to the Indian government as much as the rupee in physical notes and coins. Even the most advanced economies, like the US, UK and European geographies are grappling with the havoc unleashed by private crypto-currencies that are speculative in values, not backed by an asset and mostly used for narcotic drug deals and laundering by terror groups internationally.
It would only be wise for India to take the lead through G-20 when it assumes the group’s presidency next month on evolving a global framework on crypto-currencies. Learning from each other’s experiences with regards to crypto-currencies, their spread, crypto-exchanges and factories should be the first point.
Curbing all narcotic payments and laundering through collective global community efforts should easily be the second point for action. Thirdly, if there’s consensus on technology based diverse unregulated currencies, then rule-based transactions can be rolled out voluntarily by member countries with filters and restricted areas, at least for the time being.
Views expressed in this opinion piece are that of the author.