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Rupee Ascent toward the global journey

In the year when we have been celebrating 'Azadi Ka Amrit Mahotsav' and cherishing our rich cultural values, our much-discussed implementation of the idea of Aatmanirbhar Bharat - surely it’s a step forward in this direction. — Vikas Sinha


The exchange rate regime determines the way a country’s currency is pegged against currencies of the other country. Broadly it has two approaches. The first is the fixed exchange rate and the other is the floating exchange rate. Depending on various economic and political developments as well as the strengths, the monetary policy authority of the country keeps changing the regime or modifying the variants of the fixed rate or floating rate regime. 

Once again, the exchange rate regime of the country is at a revolving point. Before the collapse of Soviet Union in 1991, we had rupee exchange in trade with Russia. Today in 2022, because of many reasons the rupee exchange in trade with Russia is rising and significant enough to revisit the exchange rate regime to be followed. The 1991 was economic and political crisis to the country. The year 2022 is neither an economic nor a political crisis to our country. The Russian political crisis of 1991 had impacted the rupee exchange in trade unfavorably and the 2022 Russian political crisis is encouraging rupee exchange in trade favorably. The new global order is consistently emerging at faster pace in this century. It keeps changing politically, economically, and financially. The demographic profile has also emerged as our strength and an important influencing factor in the decision of exchange rate regime for us. The demographic profile impacts many things including economy and aspirations and hence impacts exchange rate as well. The RBI is in action mode for revival of rupee as a exchange in trade again.

Allowing import and export transactions to be settled in Indian Rupees by the opening of the Vostro Account is a surprise move by RBI which has put a plethora of new opportunities and challenges before us. In the year when we have been celebrating Azadi Ka Amrit Mahotsav and cherishing our rich cultural values, our much-discussed implementation of the idea of AatmaNirbhar Bharat - surely it’s a step forward in this direction.

But are we too late for this or we have been forced to do this due to rising exchange rate volatility or we have been an opportunist exploiting the global crisis at a time when Russia on one side and Ukraine representing western dominant countries are at war with each other. With the passage of time when people are less concerned with the death toll in Ukraine due to war but more concerned with rising inflation due to this war - the economic motive behind the war is obvious to all. It has taught the world that all international decisions are based on hidden economic motives.  

Developed nations or the western countries in particular or the cartel of these developed nations known by whatever name like G-6, G-8, WTO, etc have their own vested economic interest where warfare often supersedes welfare. The ongoing war also witnesses the same where Russia was removed from the SWIFT system and its account in Dollars was frozen by dominant western countries.

However, this blockage led Russia to make its International transactions in country-specific currencies and in a barter system. It also forced the world to rethink its dependency on reserved currencies particularly the US Dollar for means of currency conversions in International transactions. Further, it also raised eyebrows on the free functioning of SWIFT as an international payment interface and thus came the need to develop a new payment Interface and the desire to promote its own currency for International trade settlements. RBIs move to start invoicing international trade in Indian currency by allowing Vostro account opening and developing Unified Payment Interface is a witness to this situation.

With the abolition of the Gold standard and the Bretton woods agreement coming to an end, American Dollar emerged as the preferred choice of currency convertibility.  The world decrypted the message that the economy of the country will decide the status of your currency convertibility. With the richer country’s economies flourishing, their currencies became globally accepted and convertible while poor countries move to the bottom of convertibility. This also gave an edge to these developed countries in dictating the terms of trade and diminished their exchange rate risk & vice-versa for poor countries. 

Since independence, we have been witnessing this in our terms of trade which have been mostly unfavorable to us. On many occasions, we have seen very closely how apartheid our currency had been treated in its convertibility and as a means of exchange in global transactions. We were forced to open our economy to uncertain global market players much to our exploitation in the name of liberalization. From being an economy with too low reserves to an economy being among the highest forex reserves of 600 Billion USD our concern to mitigating exchange is clearly visible.

This recent move of RBI is a welcome move in this direction which will surely minimize this risk and decrease our reliance on Dollar. With Russia voluntarily agreeing of using bilateral currency transactions for their trade transactions Rupee has taken the flight of this global journey However since the time is ripe India is in discussion with almost 25 other countries for Rupee-based trade transactions. Other than Russia, India has also been paying Iran for its Oil import in Indian Rupees. On a close study of our import and export bills, it is evident that 40 % of our import and export countries are the same that is we are exporting to them as well as importing from them so there arises the opportunity to settle these transactions in Indian Currency. Only for the deficit trade transactions, do we need to be dependent upon the dollar.

India has emerged as an open economy with one of the largest consumer bases and in this competitive environment when everyone wants a market share of this consumer base we can negotiate strongly the terms of trade in our favor by properly regulating this market, and market player’s acceptance of Indian currency for trade settlement must be incorporated as one of the foremost terms of trade.  qq

(Vikas Sinha, Vasant kunj, New Delhi)

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