THE dollar is America’s last remaining superpower. It gives Washington unrivalled economic and political muscle. The United States can slap sanctions on countries unilaterally, freezing them out of large parts of the world economy. If the US dollar’s global supremacy erodes, America will face a reckoning like none before.”
This is what Fareed Zakaria said last week on his show ‘GPS’ on CNN. Zakaria is right; the dollar is losing a tidy amount of its sheen. So what is his argument on this drift? Zakaria believes that primarily the ‘’US’s weaponization of the dollar multiple times during the last decades has led many countries to search for a workable alternative. Coupled with the sanctions imposed on Russia post the invasion of Ukraine has forced the world to look at alternatives.
Rupee goes global
And this is where the roadmap for trade in the rupee takes off. Infact, INR has now gone global with 18 countries agreeing to trade in the rupee. What this means is that traders will be able to import goods from other countries by paying in rupees.
Responding to a question from BJP’s Sushil Kumar Modi, Union Minister of State for Finance Bhagwat Kishanrao Karad said, Special Vostro Rupee Accounts (SVRAs) were being allowed to be set up by banks of countries who are part of this agreed arrangement to approach Authorised Dealer (AD) banks in India that may get permission from the RBI after the due procedure.
The minister said that RBI had approved “domestic and foreign AD Banks in 60 cases for opening SVRAs of banks from 18 nations — Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda and the United Kingdom.” These countries will use this money to invest in Indian companies and buy goods and services from India.
The one country with which
India has had a rupee trade for a long time is Russia. The first RupeeRouble pact happened during the time of Mrs Gandhi. Now under Vladimir Putin, Russia has made ‘de-dollarisation’ a state policy. For India, the allure of trade in local currency is a road to boosting its exports. This process of SVRAs got a fillip and was fast-tracked in July 2022 when the RBI pronounced that, “It has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR [Indian rupee].”
The reason for the RBI move was, of course, triggered by the escalating commodities crisis that cascaded thanks to the Western sanctions against Russia post the Russian ‘special military operations’ in Ukraine that commenced on February 24, 2022. At that time it was believed that this mutual currency trade was the best solution to overcome the global sanctions regime that had been triggered by the West and was deeply impacting international supply chains and trade.
Enlarge the ambit
Going forward, will the rupee have enough allure to be the currency of trade with a larger pool of companies? The first prerequisite has to be expanding the pool of 18 countries that are part of the rupee trade ambit. We need to bring in countries like China, UAE and the Gulf if this has to truly take off.
One incentive for other nations to embrace this format will be purely our level of trade with them. There is still some distance to go in this considering the chasm in our trade with many trade partners, including China, where the deficit is staggering. There are other issues too like the complexities of where the surplus (beyond the mutual currency swap that comes into play once the deficit kicks in) can be invested etc, but that would mean getting into hardcore economics which is beyond the scope of this piece.
Let me end by saying that one good step forward is the announcement on March 31 of the Foreign Trade Policy (FTP) 2023, by the Commerce Minister Piyush Goyal outlining an ambitious plan to target $2 trillion in exports by 2030. Given that India’s record exports have crossed over $765 billion in FY23. That is some asking. What it translates into is roughly an average of double-digit growth (close to 15 per cent) each year for the next seven years to hit that target.