The US dollar has been the god of all currencies. Global trade, safe haven, universally accepted and even chased, the currency has ruled so far. There are a few more currencies that can claim a global status like Pound Sterling and Euro; but nowhere close to the supremacy of the dollar.
Dollar strength - a problem
And that’s been a bit of a problem lately. Inflation soared in the US, and the Fed started to spike up key rates. That has led to massive inflows into the US, making the dollar stronger than it was before. Good for the US overall. But for any country with dependence on the dollar, trade in dollars, borrowing in dollars, expenditure in dollars, or sales in anything other than dollar, this spells trouble.
India’s vulnerability
India has a natural exposure here. We import most of our oil, and in dollars. With the dollar spiking that becomes more expensive. With the price of oil rising along with that, it becomes a nightmare.
Welcome, trading in Indian Rupees
Countries facing the crunch have some defence mechanisms to ease the pain. This is usually in the form of managing reserves, or raising rates, or even trading in other currencies.
While several of these are operationalised regularly by governments and central banks, unlike ever before, on 11th July 2022 the RBI has introduced a new mechanism where international trade can be done in Rupee.
Who will trade with India?
Well trading internationally in rupee sounds good for sure, but who will India trade with? If everything goes according to plan, Russia.
Due to US sanctions, Russia is unable to use its dollar deposits. But now, we can easily import oil from Russia by paying in rupee. This isn’t completely new as well, in 2019 India did the same thing with Iran (which was also under US sanctions).
And it might not stop there, all though the main purpose of the new mechanism is trading with Russia, but there is no restriction on who you can trade with.
How will it happen?
A Vostro account will be used to settle foreign transactions in rupees. Simply put, anytime a transaction happens, this account will be debited and credited. Finally, if there are extra rupees in the Vostro account, they can be invested in Indian government bonds. Although this approach seems promising, it also has a significant flaw.
Other side of the coin
If this was always possible, why didn’t we ever trade in rupee internationally? Well that’s because you need a group of countries that are ready to accept rupee as a medium of exchange in the first place.
Even if we trade with a particular country, that country will have a huge deposit of rupee that it won’t be able to use other than to reinvest in India; until other countries are ready to trade in rupee as well.
What comes after?
For large scale adoption, enough to cause currency stabilisation, of course multiple countries will have to be on board. This seems rather unlikely immediately. However, until things pick up at least India has other tools like foreign reserves management, interest rates, bonds, and of course cheap Russian oil!
Comentarios