Data Card

Trade in rupee

Print edition : May 30, 2014
India weighs rupee trade options with a number of countries, including many non-oil producing ones, to reduce the drain of forex reserves.

To save precious foreign exchange, India is considering doing business with major trading partners, which include non-oil exporting nations, in the local currencies.

The Finance Ministry with which the Ministry for Commerce and Industry is in talks, is examining a list of countries that may favour this move.

Although the list includes important oil producers such as Nigeria, Saudi Arabia and Iraq, major crude suppliers such as Kuwait and the United Arab Emirates are not on it. Oil exporters in general are not interested in trading in local currencies because they have huge trade surpluses with India and have little to gain from rupee trade. Other countries on the list include Russia, Japan, Singapore, Australia, Indonesia, South Korea, Malaysia, Mexico, South Africa and Thailand.

Task force

In 2013, the government formed a task force with representatives from the Commerce Ministry, the Department of Economic Affairs, the –Reserve Bank of India, State Bank of India, the Federation of Indian Chambers of Commerce and Industry, the Confederation of Indian Industry, and the Federation of Indian Exporters Organisation to draw up a list of countries with which India could consider doing its trade in rupees.

The report of the task force is now with the Finance Ministry, which will weigh issues such as banks through which payments are to routed, invoicing etc., and will prepare a shortlist of the countries. Subsequently, the Commerce Ministry will begin bilateral negotiations. Since the process involves a lot of negotiations with the partner countries, officials said a decision on the issue would have to wait for the new government.

India’s recent success in rupee trade was with sanction-hit Iran—it used the currency to import crude oil.

How it works

In a currency-swap arrangement, countries that buy from each other pay with their domestic currencies at pre-determined exchange rates instead of trading in the U.S. dollar. This helps them save foreign exchange and thereby strengthen their domestic currencies.

“We have kept out countries that we know will never agree to a swap arrangement. We have included some countries in the arrangement because there are factors other than economic that could influence their decision,” a Commerce Ministry official said.

Iran willingly entered into a rupee trading arrangement with India despite a huge trade imbalance because the economic sanctions imposed by the West had restricted its trading options. The task force has tried to focus on countries with which India has a sizeable trade deficit in order to benefit most from the arrangement. However, in the case of China it has proposed a ceiling of $10 billion.

This limit is aimed at stemming the flow of Chinese goods into India, which will further tilt the balance against India.

India is struggling to halt the depletion in its foreign exchange reserves and also bring down the current account deficit. Foreign trade in rupee will make India’s balance of payments position more stable and make it an attractive destination for foreign investments.