Promoting international trade in the domestic currency will help in protecting the rupee from volatility and reduce cost of doing business in the global markets, Economic Survey said on Tuesday.
The survey suggested that it could assist Indian exporters in getting advance payments in rupee from overseas clients and in the longer term promote the domestic currency as an international currency once the rupee settlement mechanism gains traction.
In July 2022, the Reserve Bank of India issued a circular permitting an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian rupees (INR) to promote the growth of global trade with emphasis on exports from India and to support the increasing interest in the global trading community in rupee as an international currency.
The framework involves invoicing of exports and imports in rupee, market-determined exchange rates between the currencies of the trading partner countries, and settlement through special rupee vostro accounts opened with authorised dealer banks in India.
International settlement in rupee acquires significance against the backdrop of the US Federal Reserve aggressively hiking the policy rates and its hawkish stand.
"The framework could largely reduce the net demand for foreign exchange, the US dollar in particular, for the settlement of current account related trade flows. Further, the use of INR in cross-border trade is expected to mitigate currency risk for Indian businesses," the survey said.
Following the Russia-Ukraine war and the sanctions imposed by the West, India has been trying to promote rupee trade.
Protection from currency volatility not only reduces the cost of doing business but also enables better business growth, improving the chances for Indian businesses to grow globally.
The survey said that it also reduces the need for holding foreign exchange reserves and dependence on foreign currency, making the Indian economy less vulnerable to external shocks.
"Further, it could assist Indian exporters in getting advance payments in INR from overseas clients and in the longer term promote INR as an international currency once the rupee settlement mechanism gains traction," it added.
One of the pre-requisites for the emergence of an international currency is that the said currency needs to be increasingly used for trade invoicing.
In terms of foreign exchange market turnover (daily averages), as per the BIS Triennial Central Bank Survey 2022, the US dollar is the dominant vehicle currency accounting for 88 per cent of the global forex turnover. The Indian rupee accounted for only 1.6 per cent.
"If the INR turnover rises to equal the share of non-US, non-Euro currencies in global forex turnover of 4 per cent, INR could be regarded as an international currency, reflecting India's position in the global economy," it added.
Indian banks have already opened special vostro rupee accounts (SVRA) with banks of these three nations, operationalising the rupee trade arrangement.
Recently, SBI Mauritius Ltd and People's Bank of Sri Lanka opened an SVRA with State Bank of India (SBI). In addition, Bank of Ceylon opened an account in its Indian subsidiary in Chennai.
In all, 18 such special rupee accounts have been opened by 11 banks, including 2 of Russia and one of Sri Lanka, following approval from the Reserve Bank of India (RBI).