The Reserve Bank of India’s (RBI's) move to promote trade settlements in Indian Rupee could work in the short-term with countries like Russia, but is unlikely to make a significant difference over the long term since India has a trade deficit with most such countries, according to analysts. “This is unlikely to work in the longer term . Even if Russia would accept payments in rupee, but since there is a trade deficit, it may not be viable for them to take payments in rupee for long. What would they do with the rupee in bank accounts in India,” said Madan Sabnavis, chief economist at Bank of Baroda. The RBI on Monday announced to allow trade settlements between India and other countries in rupees. While the move is seen to benefit trading primarily with Russia, it is also likely to help dollar outflow and help slow rupee depreciation to a ‘very limited extent.’ Under the Indian rupee arrangement, banks in India will open Vostro accounts (an account that an Indian bank will hold on behalf of another bank) of correspondent bank/s of the partner country for trading. Indian importers can pay for their imports in rupee into these accounts. These earnings (from Indian imports) can then be used to pay Indian exporters in Indian Rupee. “Currency market is a function of lots of speculation that goes on… It (this move), I think, is actually a perception game being played out here… If the RBI is able to create a constructive ambiguity around demand for rupee and, if the market buys this argument, the depreciation of rupee may hold,” said Biswajit Dhar, professor, Centre for Economic Studies at Jawaharlal Nehru University. While Sabnavis added that the arrangment would have been viabile in the longer term, if Russia could have used the money to pay other countries, but is it unlikely that they would want to do that in rupees. Dhar said that Moscow could use this money in Indian banks to fund offset liabilities against defence contracts signed with New Delhi. Newsletter | Click to get the day's best explainers in your inbox “There are about 19 defence deals that India has signed with Russia since the current government took over, and several deals have provisions for joint ventures (under offset clause). Russia could use that Indian rupee to invest here under defence contracts. This could also help give a boost to the government's Make in India programme,” he added. Since Russia’s invasion of Ukraine, various countries in the West as well as the US have put sanctions on Moscow and the country is off the SWIFT system too (messaging system used by banks for payments and settlements in foreign currency). Russia is likely to be interested in trading in rupee since other modes of payment may not be available at present given the sanctions and the restrictions. Several countries such as the UAE, Indonesia and Myanmar are reported to be interested in trading in Indian rupee, but analysts feel that the trade deficit with these countries, especially the UAE, may impact its feasibility in the long run. Both Sabnavis and Dhar said they do not see this rupee trade agreement going beyond the countries that are in trouble or under sanctions for one reason or the other.
