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12th March 2024 (9 Topics)

Trading in Indian Currency


In what could be a "very game-changing" development for India's trade with the world, many economies big and small have expressed willingness to start trading in rupee with India.

1: Dimension: India's push for using the rupee globally

  • More and more countries are realising the advantages of trading in their own domestic currencies and a shift towards direct transactions between local currencies is gaining traction.
  • Some of these countries include neighbours like Bangladesh and Sri Lanka as well as nations from the Gulf.
  • India has already commenced trade in rupees with neighboring countries like Nepal and Bhutan. Additionally, the rupee has been included in Sri Lanka's list of designated foreign currencies to facilitate trade.
  • India's push for using the rupee globally began with its first-ever payment in rupees for crude oil purchased from the UAE.
  • This initiative has encouraged the world's third-largest energy consumer to seek similar arrangements with other suppliers.
  • To support the use of the Indian Rupee in international trade, changes have been made to the Foreign Trade Policy (FTP).
    • These alterations allow for trade settlement in rupees and aim to establish the INR as a global currency.
    • In July 2022, the Reserve Bank of India (RBI) authorised Indian banks to open and maintain special rupee Vostro accounts for partner trading countries' banks. These accounts hold the foreign banks' rupee holdings with their Indian counterparts.

2: Dimension: The Economic Perspective (significance)

  • Reduced transaction cost: By avoiding the need to convert transactions into a third currency, both parties can significantly reduce transaction costs.
  • Stability: Trade using the Indian Rupee is also advantageous because the currency remains stable against most international currencies. This stability has attracted different nations to build trade relations based on rupee trade.
  • Solution for dollar shortage: Besides, the rupee trade mechanism has proven beneficial for countries experiencing a shortage of US dollars.

Fact Box: Vostro Account

  • When an Indian trader needs to make a payment to a foreign trader in rupees, the amount is credited to the Vostro account.
  • Similarly, when an Indian trader is owed payment, the amount is deducted from the Vostro account and credited to their regular account.

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