Better Days are Coming for the Indian Rupee. The internationalisation of the Indian Rupee stands out as a rare positive of the Ukraine war. Darling of 135 crore Indians, the INR leads a secluded life, fending depreciation for a long. Reduced to a peripheral currency even in the Gulf nations, where till 1970, the Indian Rupee was an official currency, today Rs.22.00 are required to buy 1 Dirham. Post independence in 1947, India linked its money to the USD, and one Greenback was equal to INR 3.31. Today a Dollar costs Rs.83.00.
However, with a rapidly changing geo-political ambiance, the INR, appears to be finding feet outside Indian boundaries. Better days are coming for the Indian Rupee.
Historically, the first real International Currency came in 1945 in the city of Bretton Wood, USA, in the shape of US$. The value of each currency was fixed against the US$, which gave value related to Gold. Every 1 Ounce (28.35 grams) of Gold would equal US$35, meaning 1 US$ was equivalent to 1.23 grams of Gold. The US and other countries retained Gold equal to paper currency issued. The US had 75% of the world’s Gold in 1945. If a country returned US$ to America, the US returned the approved equivalent of Gold.
The stagflation of the 1970s & Vietnam War forced US President Nixon to close the Gold Window in 1971 as $ had strengthened over other Currencies. France and Germany aggressively started drawing Gold from the US by returning $ gained from the trade surplus. US Gold reserves had come down to 22% from 75% of world reserves. The Gold was delinked to the US$. Countries then issued Fiat currencies, delinking from Gold reserves or any other commodity.
Post delinking with gold, the currencies were accepted as legal tender based on Administrative Orders of governments. The system is continuing to date. The strength of a currency now depends on the state country’s economy. The stronger a nation’s fiscal discipline and monetary policies, the stronger is its currency.
With the US Dollars as a political weapon, repeatedly using it for settling rivalries, a search for an alternate currency to the US becomes serious. For India, it is a moment of reckoning due to its stature as the fifth-largest economy of world. India’s progress has poised the Rupee in solid contention. More than ten countries are working towards accepting the Rupee as a currency of the first choice for their trade with India.
Dollar-strapped Sri Lanka and sanctions-hit Russia are the first countries to use the Indian rupee trade settlement mechanism. Iran is in the forefront of selling its oil and buying Indian goods in Rupees since 2016. Reuters reported that Tajikistan, Cuba, Luxembourg and Sudan have begun using the INR mechanism. More significant trading partners, including crucial oil suppliers Saudi Arabia and the United Arab Emirates, continue to discuss the denomination of trade in rupees.Belarus is grappling with sanctions from the US and the EU for supporting Russia’s attack on Ukraine. India imports fertiliser from Belarus, and a rupee settlement is in the offing. The money heaven Mauritius has also expressed to deal with the Indian trade in the INR. Bhutan and Nepal have been accepting the Rupee as a currency of day-to-day use for a very long. And the Maldives has always been taking the Rupee. More nations are considering dealing in INR.
Across the globe, the rupee trade settlement mechanism, set up by the Reserve Bank of India in July 2022, is attracting interest from many countries apart from Russia. The mechanism is a means of using rupees instead of dollars and other significant currencies for international transactions to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the Rupee.
What is the Rupee Exchange Mechanism?
The US Dollar is the world’s reserve currency, and most International transactions settle in dollars. If an Indian buyer enters a transaction with a seller from Holland, the Indian buyer must first convert his rupees into US dollars. The seller will receive those dollars and converts them into euro. Both parties are involved in incurring the forex conversion expenses.
RBI has evolved a Vostro account route as an alternative now. Instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account. The government is bringing countries that need more dollars into the mechanism.
Benefits of Vostro Accounts:
Banks holding Vostro accounts enjoy huge float funds, which are lent to Corporates to earn handsome interest income. Indian Oil Corporation purchases oil worth millions of dollars from Iran and Russia. The Invoices drawn in INR by foreign firms are deposited into the accounts held by banks in India. This fund remains within India, providing liquidity for growth. The fund consumes on buying goods from Indian factories, enhancing the turnover and profits of Indian corporates.
Strengthening the Value of the Rupee:
The Vostro account mechanism saves precious foreign exchange for India as invoices are paid in Indian Rupees, not US$. Further, it creates massive demand for the Indian Rupee. The Indian rupee settlement mechanism strengthens the hold of the Rupee as a currency in the international Forex market, stablising its price.
Reliance on the Indian Rupee, away from the US Dollar, provides respite to counterparty countries as well, since they don’t pay India in Dollars and trade in INR held by them in the VOSTRO accounts. Opening these accounts needs approval from the Reserve Bank of India which has permitted the opening of 12 Vostro Accounts.
Experts believe Rupee becoming an international currency would reduce India’s trade deficit and strengthen its value in the global market in the long run.
-Hargovind Sachdev
About author:
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of the State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe. Has undergone International Banking Training from the Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange, Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit, Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner, Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker having conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Independent Director & consultant to various big entities in the corporate sector at present.
