Monday Morning Meeting on India-Bangladesh Trade Settlement in Indian Rupee

Dr. Anand Kumar, Associate Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, spoke on “India-Bangladesh Trade Settlement in Indian Rupee” at the Monday Morning Meeting held on 14 August 2023. The session was moderated by Dr. Ashish Shukla, Associate Fellow, MP-IDSA. Ambassador Sujan R. Chinoy, the Director General of MP-IDSA and scholars of the Institute were in attendance.

Executive Summary

India's push to promote the use of the Indian Rupee (INR) in Bangladesh comes in response to Bangladesh's declining foreign exchange reserves. This shift aims to strengthen bilateral trade, reduce reliance on the US dollar, and enhance competitiveness by lowering trade costs. While the immediate impact on Bangladesh's dependence on the dollar might be limited given its substantial imports, the strategic move highlights the INR's rising importance in trade between the two nations, with both countries considering the introduction of a currency card to further facilitate transactions and cooperation.

Detailed Report

In his opening remarks, Dr. Ashish Shukla offered a brief overview of India’s initiative to conduct international trade in rupees. He quoted RBI’s annual report on “Currency and Finance,” which stated internationalisation of the rupee is inevitable. In July 2022, a deliberate effort to internationalise the rupee was also advised in the State Bank of India's ECOWRAP report in light of capital flight from emerging market nations, including India. He emphasised that India’s decision to promote INR as a global reserve witnessed a notable upsurge in the aftermath of the economic consequences resulting from the Russia-Ukraine conflict. At present, more than 19 countries have showed interest in opening Rupee Vostro accounts, essential for international trade settlement in INR. Finally, with the inclusion of Bangladesh into this new setting, he remarked how it has also sparked a de-dollarisation debate in South Asia.

Dr. Anand Kumar began his presentation by stating that Sheikh Hasina's appointment as Prime Minister in 2009 sparked a number of constructive developments between India and Bangladesh. Economically, Bangladesh's exports to India are valued at USD 2 billion, while its imports from India are USD 13.69 billion. Both countries have implemented innovative strategies to increase their bilateral trade in times of crisis. For example, during COVID-19, they investigated trading through railroads, which cut shipping costs and expedited commercial processes. They were able to maintain access to essential necessities thanks to this technique. In a similar vein, India has once again stepped in to save Bangladesh from a dollar shortage by offering to facilitate trade in Indian Rupees.

Dr. Kumar emphasised that there is no question about the US Dollar's dominance in world trade rapidly decreasing. He claimed that although 70 per cent of world trade was conducted in USD in 2001, by 2023, that percentage has fallen to 58 per cent. He added that when powerful economies like the US increase their interest rates, it triggers a chain reaction; wherein investors withdraw funds from developing nations, leading to currency depreciation across these countries. This depreciation fuels inflation due to elevated import costs for essentials like food and energy.

The speaker underscored how the situation becomes intricate as the affected countries struggle to balance their current accounts and afford crucial imports. The issue also extends to servicing external debts, exemplified by the challenges nations like Sri Lanka and Bangladesh face. As a response to these challenges, he analysed how there is a growing inclination among various countries to diminish their reliance on the US Dollar.

He gave the example of the members of the Asian Clearing Union having collectively agreed to reduce their dollar dependence and instead settle trade using local currencies. This sentiment is echoed by Asian Finance Ministers and policymakers, who are exploring ways to reduce their reliance on currencies like the Japanese Yen. China has taken advantage of this trend, aiming to position its currency as a global reserve.

He stated that at the same time, India is also trying to improve the global status of its currency. This strategic shift, implemented in July 2022, involved the inclusion of the Indian Rupee (INR) in a segment of international trade transactions.

Dr. Kumar mentioned that India has also authorised the use of INR for settling foreign trade deals. In a subsequent development, the Reserve Bank of India (RBI) has provided authorisation to banks from 18 different countries. Three banks from Bangladesh have also been permitted to establish Nostro accounts. This strategic move strengthens economic ties between India and Bangladesh and contributes to India's pursuit of greater global economic influence by establishing its currency's credibility.

The speaker talked about how over the past year, Bangladesh has experienced a significant decline in its foreign exchange reserves, dropping from US$48.41 billion to US$29.97 billion, marking a decrease of around 28%. This decline is primarily attributed to increased import spending, with moderate remittances and export earnings. The country is grappling with challenges in financing essential imports, particularly fuel, which is crucial for its operations. Hence, the switch to INR trade and commerce. The benefits for Bangladesh are manifold. The move is expected to foster closer diplomatic ties and relationships between the two nations. For businesses engaged in cross-border trade, significant advantages are anticipated. Lower trade costs will likely enhance competitiveness, opening doors to a broader customer base and potentially boosting exports from Bangladesh to India. Additionally, conducting transactions in Rupees can streamline trade processes, eliminating the need for currency conversion when opening Letters of Credit.

In conclusion, he underscored that the initiative might not lead to an immediate reduction in Bangladesh's reliance on the US Dollar, considering the substantial magnitude of its imports, which aggregated to approximately US$75.6 billion in the fiscal year 2021. Hence, Rupee transaction may not instantly augment the declining forex reserves in Bangladesh, however, it is an important step forward. Furthermore, both India and Bangladesh are currently deliberating on introducing a currency card to further streamline transactions, with plans for its launch scheduled for September 2023 or shortly thereafter.

Questions and Comments

The floor was opened for questions and comments. The Director General, MP-IDSA, Ambassador Sujan R. Chinoy congratulated the speaker and made a few comments. He underlined several key points regarding India's role in the global economy. He emphasised the significance of neighbouring countries accepting India's economic influence for better regional growth. Despite the inevitable rise of India's economy, he stressed that this growth should involve accommodating neighbouring countries and integrating them into the economic framework.

Amb. Chinoy remarked that the recent initiative of trading in Indian Rupees is seen as a positive step toward regional economic collaboration, potentially benefiting nations like Bangladesh, Sri Lanka, and Nepal.  He advised caution in expecting the Indian Rupee to replace the US Dollar internationally, pointing out the US Dollar's dominant role in global commodities and transactions. In sum, he suggested focusing on consolidating the Rupee's influence within the region rather than aiming for immediate global dominance.

The researchers from the Institute made valuable comments. The remarks underscored the potential for India to enhance the momentum of INR's trade settlement by advocating its use within multilateral institutions like BRICS. The discussion also touched upon Russia's reservations regarding the revival of Rupee-Rouble trade, concerns raised by both Indian and Bangladeshi traders, and the limitations observed in the SAFTA Agreements.

Report prepared by Ms. Sneha M., Research Analyst, South Asia Centre, MP-IDSA.