India was the largest economy of the region in the 1900s, and it made sense for smaller economies to have a similar currency for ease of trade. With the increasing weaponisation of the US dollar amid the Ukraine crisis and political and economic unrest in India’s neighbourhood, countries in India’s sphere of influence can be insulated from such external shocks as are being witnessed in Sri Lanka and Pakistan. There is already a significant formal and informal cross-border trade, and the Indian Rupee is the defacto hard currency of the region.
The recent announcement of the Reserve Bank of India (RBI) to make Rupee as preferred mode of international trade is a progressive move. This is in line with my view expressed in April of how India should consider the Rupee trade from a long-term economic perspective.
$5-trillion economy has been a key growth target driver for which reduction of trade deficit is crucial . The key factor of China’s growth has been trade surplus.
Geopolitical situation is a key factor in determining trade deals. Currently, the tension between Russia and Ukraine has resulted in Russia looking at India as an alternative to Europe for some of its key trades. In 2020, the EU was Russia’s first trade partner, accounting for 37.3% of the country’s total trade in good with the world. A total of 36.5% of Russia’s imports came from the EU and 37.9% of its exports went to the EU. This scenario has sizably changed in the last quarter or so, with a shift towards other neighbouring countries for business opportunities.
FIVE PILLARS OF RUPEE TRADE
Global Signal
India has traditionally been viewed as weaker economy, with less control on their forex, the move of INR trade sends a strong signal. The Swiss National Bank (SNBN.S) reported a first-half loss of 95.2 billion Swiss francs ($100.08 billion) in July 2022, the biggest six-month loss since the central bank was founded in 1907. Globally, banks are facing a strong thrust of their currency devalue push.
RBI domestic policy
The RBI, over the years, has been conservative in its international trade outlook. This has resulted in volatile Rupee/USD prices. It was necessary to open the international trade in Rupee denomination to stop further slippage of INR. The current range is 79-82, with 80 as the average.
Trade Balance
Trade imbalance has been largely credited to the huge dependence of trade in USD denominated currency. To achieve a $5-trillion economy, positive trade balance is critical. Currently, with a trade deficit, achieving $5-trillion economy has its own challenges. With opening of INR trade one of the challenges is resolved. The next hurdle is if we can move 50% of our international trade to INR denomination. This will accelerate our economic growth from the current 6% to 8% or 10%. The saving, which would amount to USD 100 billion approximately, can be used to boost manufacturing and SME sector.
China Policy
The counter for One China Policy is making our Rupee powerful by international trade practices. A long-term strategy is critical to building a global voice. The Chinese consumer goods manufacturing industry depends on exports from Taiwan, but Taiwan depends on heavy energy and consumer product imports, which should be a cause of worry. The silver lining is that foreign exchange reserves of Taiwan are about 280% of its GDP, which is enough to sustain 13 months of imports. A prolonged conflict and “punishment” by China could put strain on the Taiwanese economy in the long run. Hence, one of the near term goals could be to establish Rupee trade with Taiwan. It will also reduce our import burden substantially, especially on electronics consumers.
Strengthening FOREX Reserve
India’s forex reserves are the fourth largest globally, with a current forex level of USD 535 billion. India’s forex reserve has seen tremendous growth since the 1990s. As per the data from the Ministry of Information and Broadcasting, the India’s forex reserve, which stood at 9.22 USD billion in 1991-92, jumped to 607 USD billion in 2021-22. Besides, India’s foreign exchange reserve has also multiplied 335 time since Independence.
The Indian Rupee performance is key to maintaining forex reserve.
First, it will enhance our integration in the global economy via increased trade and FDI flows. India is now the fifth largest economy in the world and an important trading partner for several countries. In 2021-22, India’s total trade with the world was valued at over $1 trillion, with exports crossing the $400-billion mark for the first time in a fiscal year. As per latest data, trade deficit rose by 87.5% to $192.21 billion in 2021-22 compared to $102.63 billion the previous year. The primary reason for this burgeoning growth has been an increase in the prices of key commodity imports, particularly crude oil. It is anticipated that using the Rupee for major imports will help reduce the trade deficit.
Emphasis has been put on GDP growth of 10% per annum to reach a $5-trillion economy. One of the factors is to control the currency fluctuations and maintain a range of 80-83. We should expect this to move annually 5-8%, along with inflation. If we can keep it below that, we should be able to do it much quicker.
The Indian economy’s strength lies in its ability to manage its debt to GDP ratio, which is currently on the higher side. For better balance, Rupee trade will be a key component.
A Rupee-denominated trade will pave the way to a future of investments, growth and reduction of trade deficit and towards a $5-trillion economy.
The author is a global expert in international trade policies and technology transfers. The views expressed in this article are those of the author and do not represent the stand of this publication.
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