RBI's rupee settlement for international trade: Can it challenge the dollar and lower India's trade deficit?

Faced with a widening trade deficit and the inability to settle trade in rupees with Russia post the Ukraine conflict, the Reserve Bank of India (RBI) has finally decided to put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in Indian rupees.

This policy measure will go a long way in promoting the rupee as a currency for trade settlement.

The idea of having international settlement in rupees was always in the policy makers minds, but the big question has been the acceptability of rupees for the exporters and importers. The events like Russia-Ukraine conflict and the sudden spiralling of current account deficit post the Covid and geopolitical developments have accelerated this move.

Take for example, the steep rise in the global commodities, especially oil imports, have pushed the trade as well as current account deficit (CAD) to an alarming level.

According to an estimate, the CAD is expected to more than double to $100 billion in 2022-23. The higher CAD is coming at a time when the interest rates globally are on the rise with RBI also hiking the short-term rates by 90 basis points to 4.90 per cent to tame the inflation.

The rising global interest rates have already resulted in foreign investors pulling out the money. The final impact is on the rupee value against the dollar. The rupee has depreciated by around 6 per cent in 2022.

Experts suggest that the bigger issue that will come for arriving at a settlement between the two trading partners will be the exchange rate or the number of countries that will be willing to accept a rupee mechanism.

The RBI has said that the exchange rate between the currencies of the two trading partner countries may be market determined. But, as experts suggest, this is, however, possible only in cases where there is a substantial two-way trade (both export and import) between the two trading partners.