The launch of international trade in Indian rupees could lead to annual savings of $30-36 billion in hard currency and widen the scope for such trades with countries in the region, easing pressure on the exchange rate, experts told ET.
The mechanism, which can be kicked off without delay with Russia, may be favourable for Indian government bonds as well. The surplus balance held in a special vostro account to be opened under the rupee payment mechanism can be used for investing in the local capital market by entities based in India's trading partners under the bespoke model.
"When a country faces a record high current account deficit, such rupee-denominated trades with select countries save dollar outflows on account of imports," said Bank of Baroda NSE -0.92 % chief economist Madan Sabnavis.
'Need to Expand Currency Basket'
"The move should also bring in rupee investments in local asset classes, including bonds and equities," Sabnavis added. A vostro account is one held by a bank on behalf of another.
India's imports to Russia amounted to about $2.5 billion each in April and May - $30 billion on an annual basis. Some analysts expect this to swell to a monthly average of $3 billion over the fiscal year, or $36 billion in all.
"This can potentially reduce India's hard currency outflows to the extent of $3 billion per month now while providing Russia with INR currency reserves to be deployed in India and provide welcome demand for India bonds," said B Prasanna, ICICI Bank NSE 0.15 %'s head of global markets.
Apart from that, the window opens up the possibility for countries such as Russia, Iran or even Sri Lanka to engage with New Delhi while they either face global economic sanctions or need financial aid. "Internationalising the rupee requires expansion of the basket of key currencies to seven or eight including our local unit from five currently," Sabnavis said.
The currencies that form the majority of the world's forex reserves include the dollar, euro, renminbi and pound. The dollar remains the world's top reserve currency but its dominance has eroded to some extent. The greenback accounted for just under 60% of allocated reserves at the end of the first quarter of the 2022 calendar year, down from 65% in the same period in 2016, the FT reported, citing IMF data over a week ago.
India's trade deficit, or excess of imports over exports, swelled to a record $25.63 billion in June, driven by imports of petroleum, coal and gold. Exports were muted, causing the gap to widen.
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