Indian rupee is gaining ground in bilateral trade settlements amid declining share of dollar in world’s forex reserves. Recently, Bangladesh became the 19th nation that signed for bilateral trade settlements in Indian rupee. Neighbouring nations like Sri Lanka, Pakistan, Myanmar are facing dollar shortages due to the shrinking balance sheet of the federal reserve. Also, the steep rise in interest rates in the U.S. is adding woes to the balance sheet of struggling nations.
To stem dollar outflow, policymakers in India’s neighbourhood have started signing rupee trade settlement deals. Such bilateral deals are a big boon for nations like Bangladesh that run trade deficits with India. As per the Ministry of Commerce, Bangladesh saw a trade deficit of $14.18 billion with India in FY22 while in eleven months of FY23, the deficit was $8.77 billion.
The BIS Triennial Central Bank Survey of 2022 reports that only 1.62% of global transactions are settled in Indian rupee, while the number of transactions settled in the Chinese renminbi and dollar were 7.01% and 88.45%, respectively. But in recent times, the government of India has initiated dialogue with many nations to settle trade deals in Indian rupee.
In mid March, Bhagwat Karad, Minister of State for Finance informed Rajya Sabha that RBI has granted approvals in 60 cases for the opening of Special Rupee Vostro Accounts for correspondent banks from 18 nations. These include India’s neighbours like Myanmar, Fiji, Sri Lanka and Mauritius. Even banks from Botswana, Germany, Guyana, Israel, Kenya, Malaysia, New Zealand, Oman, Russia, Seychelles, Singapore, Tanzania, Uganda, and the United Kingdom have signed deals for Special Rupee Vostro Accounts.
To settle cross border trade with India, Bangladesh has authorised its two banks namely Sonali Bank and Eastern Bank Limited to open Rupee Vostro accounts with India’s ICICI bank and State Bank of India.
In eleven months (till Feb) of FY23 Indian export to Bangladesh was $10.63 billion or 2.6% of India’s total export while imports stood at $1.86 billion or 0.28% of India’s total import. Due to negative trade balance with India, trade settlement in Indian rupee will reduce pressure on forex reserves of Bangladesh.
After the Russia-Ukraine war, India along with other BRICS nations have started signing trade settlement deals in their own currencies by-passing U.S. dollar. Recently, India and Malaysia have reached a bilateral agreement to settle trades in Indian rupee in addition to the current modes of settlement in other currencies. Also, India and UAE are in talks to use Indian Rupees to trade non oil commodities in a shift away from U.S. dollars.
By-passing U.S. dollars and forging bilateral trade settlement deals is getting reflected in declining share of dollar in world forex reserves. As per International Monetary Fund, at the end of 2022, global forex stood at $11.96 trillion in which U.S. dollar’s share was 58.36% which is a 26 year low. India has a foreign currency asset of $514 billion at the end of April 07 in which around 40% of FCAs are estimated to be non-dollar assets. Thus, it is estimated that around $310 billion dollars of foreign currency assets are dollar denominated assets in india’s forex reserves.