Opinion The rupee non-fixation

While crude oil imports from Iran are allowed,there are UN and EU sanctions on several items.

ThimphuFebruary 7, 2011 10:30 AM IST First published on: Feb 7, 2011 at 10:30 AM IST

Every year,Iran exports $ 12 billion worth of oil to India and imports $ 1 billion worth of goods. Hence,some kind of settlement mechanism is needed. Earlier,this used to be the Asian Clearing Union (ACU),for settling transactions between Bangladesh,Bhutan,India,Iran,Nepal,Pakistan,Maldives,Myanmar and Sri Lanka.

Before US sanctions against Iran,till 2008,ACU invoicing used to be in US dollars. After 2008,it switched to Euro. But we were saddled with a problem in late (October) 2010,when EU required certification that all deals that involved Iran and used Euro would have to have a certificate that provided details of every transaction.

While crude oil imports from Iran are allowed,there are UN and EU sanctions on several items. The certification was to ensure that these sanctions werent violated. ACU mechanisms ensured clearing at the aggregate level,not item by item. Item by item certification is easy for something like crude oil imports. It is difficult for other items.

There was no way RBI could have monitored this. Hence,in December 2010,RBI said that all transactions with Iran would have to be done outside ACU and we were stuck with a problem.

We have ostensibly solved the problem in February 2011,after weeks of impasse. Invoicing will be in Euros,but transactions will be routed through a German bank,not RBI. That is,the German bank will accept the burden of certification and we have solved the problem and the impasse. We have in a way. But did we have to do this? Iran was willing to accept payment in rupees,though because of the trade surplus,Iran would have had a surplus of rupees. What Iran did with those rupees wasnt our problem,was it? It could have imported more from India. It could have invested in India. It could have found other countries that were interested in purchasing these rupees.

In other words,a market would have developed for rupees. The rupee has a symbol now,one of the few countries in the world to do so.

A symbol doesnt establish a currency,policies do. For example,convertibility is required. Other than some capital account restrictions,the rupee is moving towards convertibility. But despite the symbol,do we believe in our currency? Had we done so,we would have moved away from the fixation with the US dollar and Euro.