By Ashis Biswas
“Prospects for the rupee firming up as an international currency further brightened after the recent agreement between India and the UAE, allowing bilateral trade by using the dirham and the rupee. Carrying out financial transactions and the dispatch of remittances etc using the digital modes of communication will become a great deal easier for the 3 million strong Indian community living in the Emirates.’’
In South Asia, the recent agreement between India and Bangladesh, to use their respective national currencies (rupee and taka) for bilateral trade will help boost Bangladeshi forex savings by at least $2 billion US annually.
While this is one of several factors behind the decision, other bigger economic interests are also involved. The foundation of the regional economy will be strengthened, feel observers, quite apart from immediate relief foreseen for the Bangladeshi economy. It was Sri Lankan president Ranil Wickremesinghe who had some time ago announced plans within the S Asia region to switch to using the Indian rupee avoiding the US dollar, in bilateral trade. Discussions between India and Bangladesh had been going on for some time. The outbreak of the war in Ukraine and its massive negative impact on developing economies worldwide was a major factor behind the current new thinking among many countries, forcing them to address a rapidly deteriorating financial situation urgently.
The months ahead should see the growing acceptability/use of the Indian rupee as an international currency suitable for conducting bilateral /other trade. Around 18 countries have so far expressed their willingness to use the Indian rupee. Among these are Russia, the UK, Fiji, Singapore Malaysia, Mauritius and Israel. Reserve Bank authorities have agreed in principle to assist banks in these countries as well as India to work out the modalities going forward.
Prospects for the rupee firming up as an international currency further brightened after the recent agreement between India and the UAE, allowing bilateral trade by using the dirham and the rupee. Carrying out financial transactions and the dispatch of remittances etc using the digital modes of communication will become a great deal easier for the 3 million strong Indian community living in the Emirates. Bank authorities in both countries are taking necessary steps like the mutual opening of Nostro accounts to implement the provisions agreed on so far.
While neither India nor Bangladesh making much fanfare about the matter, the choice for the rupee comes as yet another step taken by several countries to reduce their dependence on the US dollar as the dominant, almost unavoidable ,currency for the conduct of international trade. At present, around 80% of the world trade and business is conducted in US dollar transactions.
However, from within the non-Western developing world, where most of the world population live and economies are growing the Chinese yuan is slowly emerging as an effective alternative to the US dollar . The decision taken by China and Russia to avoid the US dollar and other major western currencies like the Euro in their massive trade/business transactions has certainly has had some impact in the world economy.
A de-dollarising trend has taken firm root affecting around 15% of the aggregate world trade/business transactions. It has become stronger especially in the wake of unprecedented economic sanctions (numbering over 7000!) slapped on Russia following the outbreak of the Ukraine war.
Most countries have been shocked over the sudden freezing of Russian forex reserves of over $ 600 billion held in US banks by Washington and by Moscow’s apparent inability to do very much against the combined economic might of the US-led Western Block, even by way of legal remedies !
The American decision has caused concern among most countries holding positive forex reserves in US- owned banks, that they might well also fall victim to such strong-arm economic unilateralism from the West for if they incurred the wrath of the US and its subservient European allies over their policies / political interests in different regions. That could spell an immediate end to their existence as sovereign, independent nations threatening their very survival.
One major reason Russia was not hurt much by western sanctions was its enormous land mass, its huge natural/mineral resources and high levels of education and economic advancement. Frustrated Western financial writers who had predicted a total Russian collapse within a week after the first tranche of sanctions were announced, later admitted – without benefit of apology – that they had ‘underestimated’ the strength of Russia’s economy !
Various alternate strategies are currently being tried out among nations to bypass future US sanctions, following the formation of unannounced creation of nations/countries currently facing such sanctions — including Iran, Turkey, Venezuela , Russia and others. The process gained momentum after the American sanctions were announced against Russia. The recent strengthening of the US dollar in recent months again has emerged as a major burden for the bulk of developing countries. Their national currencies have progressively declined in exchange value vis-a-vis the dollar – like Bangladesh, Sri Lanka, India and Pakistan. Already these countries were struggling to maintain their rapidly reducing forex reserves.
The weakening of their national currencies against the dollar came as a double whammy for their economies, fuelling domestic inflation, worsening budget deficits and affecting fiscal capacities generally.
However, while India has cautiously welcomed the increasing acceptance of the rupee as a reliable unit in international trade especially within the developing world, it did not succeed in its efforts to get Russia on board with other countries. Thanks to its massive export of crude oil to India in recent months, Russia worked up a hefty trade earnings surplus vis-à-vis India, but ended up holding billions of Indian rupees!