Not every country—not even Russia—may be ready to settle trade in Indian rupees

Not every country—not even Russia—may be ready to settle trade in Indian rupees
Image: REUTERS/Mikhail Voskresenskiy
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The Reserve Bank of India (RBI) allowed entities based in the country to settle trade with their global associates in rupees, but there may not be many takers for the facility.

Russia is seeking payment from some Indian importers in the United Arab Emirates (UAE) dirhams for its oil trade, Reuters reported on Monday (July 18). An invoice accessed by Reuters showed that such payments are to be made to Gazprombank via its correspondent bank in Dubai, Mashreq Bank.

Russia is now India’s second-largest source of crude oil.

In April, Russia’s foreign minister Sergey Lavrov said his country was keen on increasing the use of non-western currencies to trade with “friendly” nations.

The rupee, however, is not widely used in the foreign exchange market for international transactions. This may hinder its adoption for global trade payments, experts said.

What are the hiccups?

The RBI’s July 11 circular had said that rupee funds in special vostro accounts held by overseas entities can be used for foreign direct investment into India and against the purchase of Indian government bonds.

A “vostro account” is one operated by a bank on behalf of another—usually based in another country—to facilitate wire transfers and other business transactions.

The sticking point, then, is the rupee’s conversion into the currency of a foreign entity’s country of domicile. Besides, the return on investment in any other asset class—Russian bonds, for instance—is more than what one could earn from Indian securities. Investing in Indian bonds may not, therefore, be attractive enough.

In any case, this is not the first time that the RBI has gotten into a deal to settle trade in rupees.

In 2018, India imported oil from Iran under such a system, with Iranian companies opening accounts with Indian banks. The payments made into these accounts towards oil imports were then used by those firms to buy goods from India.

However, India exports only 15% of what is imported from Iran, which meant that the rupee funds were left idling in those accounts.

Similarly, in Russia’s case, while imports stood at $5.03 billion in the first two months of the financial year 2023, exports were at a mere $245 million.

“To internationalise the rupee, we basically must open up our capital account,” economist Ajit Ranade wrote in The Times of India. “The pre-requisite is low and stable inflation, low ratio of bad loans in the banking system, stable exchange rate, low fiscal deficit, and a moderate current account deficit.”

India does not have the ability to withstand large and abrupt movements of currency, Ranade wrote.

Why dirhams?

The Emirati dirham is pegged to the US dollar and is among the world’s most stable currencies.

The UAE has maintained its neutral position on Russia, not imposing any sanctions. Further, the Moscow currency exchange is preparing to launch trading in both the Uzbek sum and the UAE dirham.

Besides, over time, Dubai, the Arabian Gulf’s financial and business centre, has emerged as a refuge for Russian wealth.