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De-risking to defanging currency, trade deals

Rupee, UPI, desi currency trade has taken world by storm. Prime Minister Modi thrust in France, UAE paying handsome dividends

K.A. Badarinath

Defanging to de-risking global trade and currency deals for India is what Prime Minister Narendra Modi achieved in his visit to France and United Arab Emirates (UAE) last week.


Agreements concluded during Prime Minister Modi’s visit not only make trade and currency deals more advantageous from Indian perspective but also reflect the country’s growing confidence in shaping commercial partnerships across geographies.

Otherwise, how would one explain taking United Payments Interface (UPI) and RuPay to France or for that matter, UAE? 

In his West Asia sojourn, UAE and India’s decision to denominate bilateral trade in Rupees and Dirhams is again a big departure from dollar or Euro centric transactions. This is over and above bringing the UPI and RuPay to Abu Dhabi.

Currency transactions at retail level on Indian digital platforms to large rupee denominated trade deals have been described by some analysts as ‘de-dollarization’ of Indian economy.

But, India’s latest thrust on currency and trade front are more to do with her growing economic and investment muscle and acceptability rather than moving away from the US greenback or euro.

Indians visit to the Eiffel Tower in France by purchasing tickets in Rupees may be simpler way of presenting the implications of latest agreements for hoi polloi.

The deal involving Lyra of France and National Payments Corporation of India to become operative in September this year would mean much more than paying for tickets at tourist spots in rupees.

Wider and willing acceptance of Indian Rupee in Europe is due to financial innovation making Indian digital payments platform UPI secure and affordable across continents.

The decision to link United Payments Interface with UAE’s Instant Payment Platform (IPP) makes the country’s digital payments foray wider and deeper in West Asia.

In fact, the deal between RBI and UAE’s Central Bank allows for RuPay and UAE Switch interoperable. India’s structured financial messaging system (SFMS) will go to UAE thereby instantly recognizing Indian debit and credit cards.

Larger implication is that holding Indian Rupee by central banks and dealers globally by value and quantity will go up many-fold in few years from now. Also, internationalization of Indian rupee is on the verge of becoming a hard reality.

Rupee denominated export and import of goods and services internationally will make the Indian currency more tradable given the large ticket size of these transactions.

France and UAE are not isolated cases in accepting Rupee denominated trade deals, UPI, RuPay or Rupee Switch. Singapore’s PayNow had done a deal with NPCI to embark on UPI platform. It moved Indian digital payments platform to South East Asian one step further.

In May this year, India and Russia had announced making payments easier through RuPay and Mir cards in both countries. UPI of India and Bank of Russia’s Faster Payments System are being linked to make seamless real time transactions in Rupees and Roubles a reality apart from deal on financial messaging systems.

 Non Resident Indians (NRIs), businessmen, tourists and students in ten countries including Australia, Canada, US, Oman, Qatar, Saudi Arabia and United Kingdom apart from others could either receive or send money once their domestic bank accounts were linked to their international phone numbers.

As per independent consultancy Price Waterhouse Coopers (PwC), one billion rupee denominated transactions per day is estimated to happen in next two years through United Payments Interface and RuPay network. Already, over 73 per cent non-cash transactions in India have gone digital on UPI.

Over 18 countries have either opened or in the process of opening Vostro accounts to settle trade deals in rupees or their respective local currencies moving away from US dollar, euro, UK pound or any major international currency. Latest to join this jamboree is Indonesia whose finance minister Sri Mulyani Indrawati firmly stated in Gandhinagar indicated that bilateral trade will happen in Rupees and Rupiah.

Bangladesh went one step further and began trade settlements in Indian rupees. This was limited to US dollar till last week.

India’s trade valued at US $ 1.6 trillion in last one year seem to have shaped the country’s strategy on cross border currency deals and rupee transactions.

And, Indian strategy of gaining acceptability for rupee is however distinctly different from China’s ‘wolf worrier’ investment and loans strategy to gain dominance.

Significant progress made by India on rupee’s acceptability and trade transactions cannot however sidestep the challenges in making it part of the reserve currency basket.

Current strategy adopted by Reserve Bank of India (RBI) and Indian government has the potential to deliver notwithstanding its limitations.

Unless rupee is increasingly used in current account transactions like investments and capital flows, internationalizing the currency may hit a wall.

Secondly, as the RBI working group recommended, Rupee must get included in Special Drawing Rights basket of currencies maintained by International Monetary Fund (IMF) to hold its assets. Recalibration of Foreign Portfolio Investments (FPI) may have to be considered for hastening the path to internationalizing rupee.

There has been serious discussion amongst BRICS countries to settle trade related transactions within the group in local currencies. A conscious decision on use of member countries’ currencies to square off trade deals would translate to democratization of economic world order.

For the stakeholders, reduction in transactions costs, limiting the foreign exchange risks and more safeguards to the trade deals will be accrued apart from huge optimization in capital costs.

India accounting for a modest two per cent of global trade in value terms limits internationalization of rupee. Similarly, there may be little to modest enthusiasm to denominate Indian debt globally in rupee terms instead of dollar.

Internationalizing rupee and turning it to a currency in reserve is a long haul project for which a firm foundation has been laid by the Modi government.

(Author is Director & Chief Executive of non-partisan think tank, Centre for Integrated and Holistic Studies based in New Delhi)

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