New Delhi: India and Russia are increasingly opting to route goods operations through third countries such as the UAE as the nation’s currency – the dirham – is pegged to the dollar and enjoys global stability, people aware of the matter told the Economic Times.
The countries are facilitating transactions in currencies other than rupees, roubles and dollars, the people quoted above told the business daily.
“There is not that much interest at present in the rupee transactions,” said one of the persons cited above. “While the interest is picking up slowly, there are complex invoicing arrangements to be carried out as the existing systems are heavily dominated by the euro and the US dollar. Hence, the push for routing it through third countries.”
In July 2022, the Union government had said it will be setting up of a mechanism to settle international trade in rupees.
The Reserve Bank of India in March granted approvals to foreign banks in 18 countries to open Vostro accounts to settle international trade in rupees.
According to news reports, the central bank has allowed Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the UK to open Vostro accounts as of now.
The move came as the domestic currency was under tremendous pressure in the wake of Russia’s invasion of Ukraine since February 2022. Moreover, with the US sanctions on Russia hampering trade, several countries made efforts to move away from the dominance of the dollar in global trade.
Business Standard reported that the rupee depreciated 7.8% in the last financial year, the most since 2019-20.
The rupee fell more than 10% in 2022, performing worse than almost all Asian currencies. It has closed the financial year of 2023 at 82.18 to a dollar. At this time last year, it was 75.79.
According to RBI deputy governor T. Rabi Sankar, rupee trade volumes were not picking up due to teething issues.
“It’s completely a new paradigm for stakeholders – for importers and exporters from both sides, for banks on both sides. Both sides meaning, India and whichever is the country at the other end. They are getting used to it. It is something which we expect will improve steadily,” the Economic Times reported RBI governor Shaktikanta Das as saying.
However, according to another ET report in February, the gap between India and Russia’s exports and imports is rising, which is making the local currency payment mechanism futile.
The newspaper said that no payment has been initiated because Russian banks do not want excess rupee piling up.
Under the rupee trade mechanism, Indian importers can now make payments in ‘rupee’ which will be credited to a Vostro account (special rupee accounts in Indian banks) of the corresponding bank of the partner country, while Indian exporters will be paid from the balances in the designated Vostro accounts..
The surplus rupee balance in the Vostro accounts can be used for investments in government securities, payments for projects and investments, and for export-import advanced flow management.