- Prelims: Current events of international importance, currency swap, swift, BRICS etc
- Mains GS Paper II: Bilateral, regional and global grouping involving India and Affecting India’s interests etc
ARTICLE HIGHLIGHTS
- India is a favored trading partner, with potential for a large market.
- Since March 2018, 23 advanced and developing countries have agreed to have currency swap arrangements with India, extending credits in settling transactions.
INSIGHTS ON THE ISSUE
Context
Currency Swap Arrangement:
- A currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
- The facility is to provide swap support as an alternative source of funding for short-term foreign exchange liquidity requirements.
- In 2020, the RBI signed a currency swap agreement for extending up to USD 400 million to Sri Lanka.
- Central banks and Governments engage in currency swaps with foreign counterparts
- to meet short-term foreign exchange liquidity requirements
- to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
- The swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
Use of rupee for international payments:(Sanctions imposed by the United States and the European Union on Russia):
- To settle payments between India and Russia the Indian rupee in transactions related to trade between the two countries was used.
- Payments from either India or Russia go to the Rupee Vostro accounts, opened in Russian banks by the authorized dealer banks in India.
- It takes care of settling payments between the two countries.
- Indian importers, going by the terms in this arrangement, pay rupees to the Rupee Vostro account through authorized Indian banks against invoices presented by the Russian supplier.
- The arrangement will provide for payments to Russians — for items India has been importing on a regular basis such as
- mineral fuels
- crude oil
- air defense system.
- Exports from India can be paid in rupees from the same Vostro account maintained with the corresponding bank in Russia.
What are the challenges?
- Payments with Russia continuing with a trade surplus despite global turmoil
- In 2020-21 amounted to $3.42(three point four two billion, followed by similar surpluses in the following years.
- Russia is reluctant to hold more of the Indian rupee as an asset in the Vostro account (as the rupee has a low rank in the global currency hierarchy and may be subject to depreciation)
- India faced an issue in arranging for payments and letting the agreement continue.
- The sanctions prevent some Russian banks from making or receiving international payments using SWIFT or by purchasing the rouble at an exchange rate which is too volatile in the market.
- Indian refiners have settled some payments for Russian oil imports using the Chinese yuan — which seems to be acceptable to Russia.
- Russia is selling oil to China and accepting yuan payments.
Agreements in the past(Between India and Soviet):
- Bilateral trade and clearing arrangements(1950s): This was a major tool used in conducting trade with the former Soviet Union and countries in the Soviet bloc — arrangements
- It reflected the inter-war clearing arrangements in Europe largely used to contain and confine mutual trade within the region.
- Bilateral trading agreements between India and the Soviet Union provided a closed account in rupees to handle merchandise as well as credit-related transactions between the two countries
- The rupee was the medium for all such dealings.
- The Soviet Union set up a steel plant in Bhilai
- Loans from the Soviet Union to India as well as the net proceeds from trade were pooled through the bilateral clearing account which was denominated in rupees.
- The floating of the dollar in 1971 led to a turmoil in the currency market and the rouble, at 10 to a rupee.
- With the Balkanisation of the former Soviet Union:The India-Soviet Agreement had a natural ending at that stage.
Chinese Yuan and BRICS:
- There is a history of opposition, in the context of BRICS, to the use of the Chinese currency by the non-Chinese members of BRICS.
- This was in the context of setting up a clearing arrangement among BRICS members to settle the consistently large surpluses that were held by China.
Settlements in local currencies(rupee-dirham agreement)
- Between India and the United Arab Emirates (UAE), covering transactions in trade, remittances and capital flows.
- The process will help to avoid exchange risks for both trade partners
- It will save, for India, dollar payments for its imports of crude oil and minerals from the UAE.
- The agreement provides for interlinking their payment and messaging systems.
- It makes for quick and cost-effective transfers of money for an estimated 5(three point five) million Indian community in the UAE
- 18% share in terms of the total remittance flows into India.
Way Forward
- With the Indian rupee, the Russian rouble, China’s yuan, the UAE’s dirham and Indonesia’s rupiah sharing the common goal of local currency transactions.
- A geo-economic and political turn with countries in the South
- They are getting ready to trade and settle their payments with one another without the use of the hegemonic currencies from the advanced economies in the North.
- The set up will avoid seeking the help of institutions in the advanced countries, which include the IMF and the World Bank as well as private capital — at least in settling their mutual transactions.
- Political differences as well as the disparate status of currencies may crop up as issues, especially with China’s role in it.
- But geo-economics may prevail over geopolitics to overcome the differences.
QUESTION FOR PRACTICE
What is the significance of Indo-US deals over Indo-Russian defense deals? Discuss with reference to stability in the Indo-Pacific region.(UPSC 2020) (200 WORDS, 10 MARKS)
