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Self-Reliance in international payments

Whatever the process, whether barter or linking of different payment systems or use of digital currency, we will have to achieve self-reliance in payments. — Dr. Ashwani Mahajan


Prime Minister Narendra Modi has recently said that self-reliance is the best suited strategy to deal with situations arising out of the Russia-Ukraine war. With regard to ongoing war between Russia and Ukraine, some people believe that if this war goes on like this and Ukraine’s friends, such as America and European countries join this war, then this war may head towards the World War III. But apart from this concern, there are many other types of concerns in India and the rest of the world. Given these apprehensions, Prime Minister Narendra Modi has called for self-reliance as a strategy. 


It is noteworthy that Russia is the third largest producer of crude oil of the world; and if supply of crude oil is blocked by way of sanctions, the prices of crude oil in the world may increase further. Currently, amidst fluctuating oil prices, Russia has offered to supply oil to India at 25 percent discount. India has also accepted this proposal and import of crude oil has already started. But the road to importing oil from Russia is not easy. Though, US has said for the time being that this import of crude oil by India, doesn’t violate sanctions, the issue of payments continues to be an area of concern. In this context we need to ensure that nothing comes in way of cheaper import of oil by India, to keep away oil price inflation in the country.

Blocked payments

US and European countries have blocked Russian banks from the international payment gateway, SWIFT, used in global financial transactions. Finding a solution to this problem, India and Russia have decided that they will settle their transactions in Rupees and Rubbles, that is, India will not only buy oil25 percent cheaper, but payment for that oil will be made in rupees.

The question is, what will be the impact of blocking of SWIFT on India and the world? With the blockade of SWIFT, India and the world will have to create alternative payment systems. Payment can also be made through China’s payment system called the Cross Border Interbank Payment System (CIPS). However, India and Russia have decided to exchange in Rupee-Rubble. On the other hand, Indian banks can do business with Russia by registering with China’s payment system CIPS, but since CIPS uses the RMB as currency, it would be good for India to create an alternative payment system which is based on Indian Rupee.

One of the options for India is to integrate its UPI payment system with Russia’s MIR system to make payments easier. Russian banks can open their accounts with the Reserve Bank of India and where Russian banks can keep deposits of Indian Rupees. But here the difficulty may come that since India has a trade deficit in the trade of India and Russia, the deposits of Indian Rupees with Russia will increase. In such a situation, Russia can pay in rupees for imports coming from other countries that accept payment in rupees.Apart from this, another option is that of payment through digital currency of the central bank.

Shattered trust

Central banks of different countries keep foreign exchange in other countries. For example, the Reserve Bank of India keeps its foreign currency in the Central Bank of America (Federal Reserve), similarly other countries also keep reserves of dollars in the Federal Reserve, which includes Russia. Russia’s access to their foreign exchange reserves has now been blocked due to US and European countries blocking Russian banks in SWIFT. In such a situation, while Russia has definitely lost confidence in the US Federal Reserve; other countries of the world are also now thinking that their deposits in central banks of other countries are not safe.

No doubt, Russia is in trouble due to economic and other sanctions imposed by US and its allies, though there is no immediate threat, such sanctions may also be imposed on India, on one or the other pretext. India had been the victim of such sanctions in the past as well. We would need to deal with such an eventuality. Recently, the Reserve Bank’s governor has also said that even if there is no reason for economic sanctions on India, we still think that all countries must now rethink about their foreign exchange reserves. India has already started diversifying its foreign exchange reserves and today we are keeping our reserves in many other currencies including gold, dollars, euros etc.

Since the world’s trade is dominated by dollars and dollars are kept only in American banks, because the sovereign currency of any country can be kept only in the banks of that country. E.g. Euros can be kept in European banks, Dollars in American banks, Yuan in Chinese banks and Indian Rupees in Indian banks only. Nostro account is opened for mutual transactions,owned by residents of another country. It would be useful for India that India should have its own payment system which is based on Rupee.

The way forward: Self-reliant payment system

Countries on which economic sanctions have been imposed, finding it difficult to sell their goods, are ready to sell goods cheaper than the market to India. Due to the war, oil prices in the international market have increased significantly, but not only Russia but also Iran is ready to sell oil at cheaper prices and on our terms (in exchange for payment in rupees). For imports from such countries, we can make payments in our currency under the barter system. But we have trade deficit with many countries, so barter is not always practical.

For a more viable payment system, we can create linkage between our payment system (UPI) and payment systems of different countries, and can circumvent SWIFT system under the influence of USA and European countries. For example, India can establish self-reliance in international payments by establishing a linkage with the payment systems of other countries including Russia’s Mir payment system and China’s payment system.

Not only this, nowadays the trend of digital currency has also increased. However, due to the huge fluctuation in the value of private cryptocurrencies, it would not be advisable to use them for payments. India has recently decided to launch its own digital currency through our central bank, that is, the Reserve Bank of India. This is called Central Bank Digital Currency (CBDC). Experts believe that international payments can also be possible through use of this digital currency.

Today, when India is moving forward towards the goal of self-reliance in all spheres of the economy including defence goods, electronics, telecom, chemicals, consumer goods etc., with regard to international payments, we should not be subject to the whims of countries like US and Europe in payments also. For this it is necessary to achieve self-reliance in international payments as well. This we will have to achieve by any means. Whatever the process, whether barter or linking of different payment systems or use of digital currency, we will have to achieve self-reliance in payments.       

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