NEW DELHI: India is exploring the possibility of developing trade settlement mechanisms in national currencies with East Asian countries and members of the Asian Clearing Union (ACU) after having made similar arrangements with 18 other nations, people familiar with the matter said.
The move is aimed at having greater stability in the global financial system, internationalising the Indian rupee and reducing dependency on hard currencies such as the US dollar, two persons said. These efforts come on the heels of moves by Iran, the current chair of ACU, to “de-dollarise” transactions within the body that facilitates settlement of payments on a multilateral basis, a third person said.
The ongoing talks are aimed at reaching mutually agreed alternative arrangements, in addition to the existing system of using freely convertible currencies such as the US dollar, the people said on the condition of anonymity.
China, Japan, Korea, Taiwan and Hong Kong are some major East Asian economies. The ACU, established in 1974 at the initiative of the United Nations’ Economic and Social Commission for Asia and the Pacific (ESCAP), is a payment arrangement to settle intra-regional transactions among the participating central banks of Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka.
Efforts by the ACU to explore the use of domestic currencies for trade settlement are being pushed by Iran, which is also home to the headquarters of the body, the people said.
“India has emerged as a global power with the fastest growth among major economies. It replaced the UK to become the fifth largest economy and 18 countries have opened about 60 special rupee vostro accounts (SRVAs) for trade settlement in national currencies,” one of the people said.
“This will not only give more bargaining power to Indian businesses, but also strengthen the Indian economy,” the person added. The Reserve Bank of India (RBI) permitted invoicing and payments for international trade in Indian currency in July 2022.
“Even some developed countries, such as Germany and the UK, have agreed to use national currencies for trade instead of the US dollar,” a second person said.
The 60 vostro accounts will strengthen the rupee globally and help in reducing trade deficit, the second person said. A vostro account is held by a bank on behalf of a bank in another country, and the 18 countries having vostro accounts in India are Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the UK.
The governor of the Central Bank of Iran, Mohammad Reza Farzin, held talks on “de-dollarising economic transactions” with the heads of the central banks of several countries, including Russia, Pakistan and Belarus, on the margins of the annual meeting of the ACU in Tehran during May 23-24, a third person said.
During these discussions, Farzin, who is chairman of ACU’s board of governors, also emphasised the need to strengthen the use of national currencies in bilateral trade. Farzin said strengthening relations through bilateral and multilateral monetary agreements is a model that can play an important role in developing trade between Iran and other countries.
The possibility of creating a non-SWIFT platform for connecting banking systems of countries, using the digital currencies of the central banks for cross-border payments, and clearing trade under the framework of the ACU also figured in these discussions, the third person said.
While delivering the keynote address at the annual day of the Foreign Exchange Dealers Association of India (FEDAI) in November 2022 on the theme of “Internationalisation of the Rupee: Is it time to shift gears?”, RBI deputy governor T Rabi Sankar said: “We have, in fact, taken the initial steps. Enabling external commercial borrowings in rupees (especially Masala Bonds) was one step. Though invoicing export and import in rupees was long permitted, it was being resorted to for limited uses.”
He added, “The July 2022 scheme of RBI permitting rupee settlement of external trade created a more comprehensive framework, including the flexibility of investing surplus Rupees in Indian bond markets.”
According to him, internationalisation of the rupee is a desirable objective of public policy because the use of rupee in cross-border transactions mitigates currency risk for Indian business, reduces the need for holding foreign exchange reserves, protects India from external shocks, improves the bargaining power of Indian businesses, and enhances country’s global stature.
Rabi Shankar also highlighted some risks associated with this and said: “These risks are real, but they are unavoidable if India is to progress to become an economic superpower. Macroeconomic policy would need to measure up to such risks. Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice.”
