[Answered] Discuss the economic significance and concerns associated with international trade settlement in rupees.

Introduction: Contextual introduction.
Body: Write some economic significances of international trade settlement in rupees.  Also explain some concerns associated with it.Conclusion: Write a way forward.

The Reserve Bank of India recently allows for International Trade settlements in Indian Rupees (INR). This is where trade settlement in rupees comes in – instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.

Economic significance:

  • It will make much easier for Indian exporters and importers to trade with countries (like Russia and Iran) facing difficulties in invoicing trade in the US dollar.
  • With global inflation unlike to abet, (Russia-Ukraine conflict and its impact on global food and energy prices), the US dollar will strengthen further, leading to the weakening of the INR.
  • A weakening rupee worsens the threat of imported inflation in India. This policy would largely lower demand for foreign exchange for the settlement of current account-related trade flows.
  • This would help accept the INR as a currency of choice for trade among India’s major economic partners and its recognition as a global currency.
  • Since India runs a trade deficit, settling trades in rupees will also save dollar outflows.
  • The move could assist Indian exporters in collecting advance payments in Indian rupees from overseas clients.
  • The move could have a favourable long-term influence on regional nations wanting to trade with India.

Concerns:

  • Accepting the rupee will be difficult in the prevailing global trade protectionism and geopolitical rivalries as each country wants to promote exports and reduce imports.
  • Invoicing in Indian Rupee and not depending on US Dollar may upset India’s relationship with the US.
  • It may also have an indirect impact on services sector for which we are dependent on developed markets like the US and Europe.
  • India’s share in global trade is not significant enough and dependence for import of fossil fuels, edible oils etc. are quite large. It is unlikely that exporting countries will consider Indian rupee as a currency of invoicing, unless it suits their interests.
  • The international trade transactions to be settled in Indian rupee needs to be analysed from bilateral trade equilibrium to understand their potential scope and scale.

Way forward:

  • To promote this, India should increase exports and imports so that rupee becomes a highly tradable currency.
  • This should be supported by critical reforms in financial markets which include capital account convertibility, deepening financial markets etc.
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