Russia’s Sanctions Provide an Opportunity to Internationalize the Rupee
According to a report by the state bank of India (SBI), countries are suggesting yuan-rouble or rupee-rouble trade to bypass Western economic sanctions on Russia after its invasion of Ukraine, thus creating a great opportunity for the internationalization of the Indian currency.
Internationalization is defined as the currency that can be freely transacted by both residents and non-residents and can be used as a reserve currency for global trade.
Soumya Kanti Ghosh, group chief economic adviser at SBI said that the hegemony of US $ is likely to continue in coming decades, in spite of the alternate settlement mechanism which is being envisaged by desires of selected nations to continue inter-territorial trade of compulsory nature, circuiting around the western sanctions as backdoor talks gather momentum for yuan-rouble or rupee-rouble settlements worldwide, with some enthusiasts betting for gold settlements too.
She further added that this will, however, present the moment of reckoning for the internationalization of the rupee too, supporting the need to evolve alternate payment and settlement mechanisms.
Sanctions enforced by the United States, European Union and their other western partners have isolated Russia from the Swift Payment system and busted Moscow’s trade with other countries.
Alexander Novak, who is the Russian deputy prime minister, spoke to Hardeep Singh Puri, Minister of Petroleum, last week and offered more oil to India. The Russian government said that both the parties discussed current and possible joint projects in the fuel and energy industry and noted that current projects should continue to be progressively implemented. Russian firms are also offering massive discounts on crude oil to India.
Last year, The Reserve Bank of India’s (RBI) and Finance report said that the internationalization of the rupee is unavoidable but that would complicate monetary policy.
The report said that internationalization can reduce transaction costs of cross-border trade and investment operations by diminishing exchange rate risk, but the synchronized pursuit of exchange rate stability and a domestically oriented monetary policy will be more challenging, unless supported by enormous and deep domestic financial markets which may help absorb external shocks.
The SBI report stated that the central bank has been active in the foreign exchange market and actively sustaining the rupee after it came under pressure after the intensified Russia-Ukraine conflict.
The rupee hit an all-time low earlier this month as it headed close to 77/$ levels.
SBI in its report said that with foreign exchange interference of the RBI, a part of inflation targeting, the rupee has largely lacked serrated volatility. This has worked positively, with the rupee having a rising bias that has helped to keep imported inflation in check.
The report suggested that the central bank may look at intervening in the NDF market as an alternative to the onshore market through banks in the Indian time zone.
It further added that this has the benefit of not affecting rupee liquidity. Also, the majority of the USD buying in the onshore market follows the offshore market, either for view-based trades or arbitrage. As per the research, it is a moment of reckoning for the Indian currency as countries look to circumvent the West’s crackdown on Moscow.