India is preparing to canvas major trading partners such as Iraq, Japan and Venezuela to accept payments for their exports in rupees.
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Known as currency swap agreements, they allow countries to trade in their local currencies rather than the American dollar.
An initial panel launched in August to study the effects of currency swaps recently won support from India’s central bank (the Reserve Bank of India), the Commerce Ministry and Finance Ministry.
The measure is part of a concerted effort on India’s part to stabilise its volatile currency and promote its acceptance globally.
“As our trade expands, we will push for more settlement in rupees,” noted Raghuram Rajan, Governor at the RBI, noted in his inauguration in September.
Sources have stated the measure is likely to target about ten countries for such deals, with a particular focus on oil exporting nations, and others which run hefty trade surpluses with India.
Sources stated the panel should decide on the size of the swap deals within the next few days, before it finalises which countries to target first.
International interest
In addition, China has already expressed interest to begin yuan-rupee trade, and it is hoped Japan may display interest in accepting rupees for payments.
Japan recently approved an extension to an emergency currency swap facility with India – from USD 15 billion to USD 50 billion.
Whilst Forex Consultant K N Dey noted that the extent to which this agreement has been used is not known, it is “a positive development as it provides an alternative in case of volatility,” and clears the way for a new, separate currency swap proposal that would focus on trade.
Another idea is to target oil producers such as Iraq and Venezuela which stems from a rupee payment agreement already in place with Iran.
India’s Finance Ministry has already agreed in principle to canvas Venezuela to accept rupees for selected oil transactions.
However, it is uncertain to what extent oil nations will participate with the plan. Iran only consents to rupee purchases due to sanctions imposed by Western nations which limit its payment options.
In addition, despite importing USD 2.5 billion of goods in the second and third-quarters, Iran recently asked India to purchase oil in alternate currencies.
Over a period of years India has been loosening capital controls, and permitting foreigners to invest in more of its assets.
This drive was given further motivation during the rupee crash against the dollar earlier this year. The rupee is still down by around 12%.
This sharp fall, combined with the country’s economic slowdown, could dishearten oil-exporting nations from creating swap deals.
Trade deficit
Targeting countries for rupee payments is also part of India’s strategy to enter new markets for exports, which make up nearly one fourth of its USD 1.8 trillion economy.
In the 2012/13 fiscal year, India’s trade deficit deepened to USD 190 billion.
“Bilateral currency swaps will offer a win-win situation and would ease pressure on the volatile rupee,” said Federation of Indian Export Organisations’ President Rafeeq Ahmed.
However, currency swaps need to be a finely tuned balancing act.
The global economic world is dependent on the dollar, and many countries, including India, export goods in dollars to purchase energy and other goods in dollars.
If India pushes the rupee too hard, access to dollars will stifle, meaning international trade cannot take place and the country’s economic growth may be compromised.
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