Using a Rupee Route to Get around a Dominating Dollar
For Mains
The issue
- Currently dollar acts as the hegemon in international transactions, which gives the United States unlimited powers to impose economic sanctions against its enemies, such as those under the Countering America’s Adversaries Through Sanctions Act (CAATSA).
- This has made many countries including India to look for alternate mediums for conducting international transactions
What India is doing?
- India has been taking an active interest in having the rupee used for trade and the settlement of payments with other countries, which include Russia, which are facing sanctions.
- Settling payments with Russia by India, especially for mineral fuels and oil imports as well as for the S-400 Triumf air defence system has been continuing on a semi-informal basis through rupee payments by using the Vostro accounts maintained by Russian banks in India.
- Reserve Bank has recently taken steps to formalise these vostro accounts so that these transactions can be effectively monitored.
Why changing the currency medium is beneficial for India?
- The depreciation of Indian Rupee with respect to US Dollar has made imports costlier for India, hence buying oil with a depreciated ruble, and at discounts, is not only cost-saving but also saves transport time with the use of multi-modal routes using land, sea and air routes.
- Russia might use the surpluses in the Vostro rupee account in Russian banks for additional purchases from India, which can reduce the trade deficit India has with Russia.
The challenges in implementing a Rupee based exchange system
- Primary concern is to find an agreed exchange rate between the rupee and the rubble (R-R) since both are very volatile.
- The two governments must also be able to convince the private parties (companies, banks) to accept the rupee for trade and settlements.
- There are also concerns that the purchases especially that of Crude Oil can be seen by the western nations as a ‘indirect back door support’ to the Russian cause, which can adversely impact India’s relations with the West.
- This is particularly concerning since the crude oil which India is importing from Russia is being processed and the final product is being sold overseas in West European markets.
Source The Hindu
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