Trading in rupee would ease pressure on forex reserve

Bangladesh and India are set to start using the Rupee to carry out bilateral transactions. Exporters would be able to get export proceeds in rupees from July 11, after the inauguration of theinitiative. BB governor Abdur Rouf Talukder would attend the launching event virtually to be organized by the High Commission of India in Dhaka. The move is a breakthrough for Bangladesh as the country is seeking to cut US dollar dependency while its foreign exchange reserve is falling due to various global factors.

Since the beginning of the Russia-Ukraine war, the surging exchange rate of the dollar and higher import costs lead the country to an inflationary crisis. Amid the volatile condition, like other developing countries, Bangladesh's foreign exchange reserves have been decreasing. Since then, to deal with the crisis relaxing pressure on the USD, the discussion of trading in local currencies come to light.

Though primarily the Bangladesh Bank indicated that trading in local currencies between the two countries may start in September, the countries now changed the decision from trading in taka-rupee to trading only in rupee. During the ministerial meeting of the two countries in December last year, a proposal was made to conduct commercial transactions in rupees. The matter was then raised in the meeting of the National Economic Council of Bangladesh in March. The State Bank of India last year asked its exporters to avoid dealing in dollars and other major currencies with Bangladesh. It is mentioned in the report that this step was taken to prevent the reduction of Bangladesh'sreserves.

Later, a delegation from India visited Bangladesh in April this year and discussed the mode of commercial transactions between the two countries in taka and rupee. To conduct the transactions in local currencies, Banks from both countries would have to open accounts – known as vostro and nostroaccounts in global accounting – in the banks of other countriesto facilitate cross-country transactions. People importing goods from India would have to be able to add Indian rupees to their accounts. Similarly, Indians could also add Taka for payments inBangladesh.

According to the central bank, the method of transaction was supposed to be launched as a pilot program through Bangladesh's Sonali Bank, Eastern Bank, and India's ICICI and State Bank of India. Now trading will be taking place only in the Indian rupee from this July with slight change in the policy. The Eastern Bank and the country office of SBI in Bangladesh have already opened nostro accounts with Indian ICICI Bank and SBI after getting approval from the RBI. Sonali Bank will open the account as soon as possible.

Bangladeshi exporters are now able to receive the export payments in rupee and the importers can open LC in rupee too. Bangladesh imports $14 billion worth of goods from India against $2 billion worth of exports annually. Considering the large number of trade deficit, importers would be able to spend only the equal amount of rupee comes from export earnings. However, the two countries have also introduced the system ofpayment in both rupee and taka for transactions which will be started from September this year as mentioned earlier. But this won’t be applied for export-import payments. This would be possible through a debit card dubbed the "Taka Pay Card”,which will enable customers to withdraw either rupees or taka. 

The borrowers would be able to pay for domestic purchases with taka with the benefit of spending in Indian rupees up to $12,000in rupees while visiting India. The exchange rate will be calculated from Taka to Rupee or Rupee to Taka. 6% conversion expenditure loss will be saved as there is no need to convert taka to dollar and then dollar to rupee. This will benefit millions of Bangladeshi people visit India for various purposes includingmedical care, tourism, and religious reasons.

Since 2022, being the world’s fifth biggest economy, India emerged as one of the fastest-growing economies in the world. It will move forward to third place behind the US and China by 2030. The Indian economy continues to remain robust and stabledespite instability in the global macro economy and rising risks to financial systems. The annual Export and import volume crossed $400 billion and $560 billion in 2021.

The trend of using local currencies in foreign trade has increased all over the world, as the Russia-Ukraine war begins. In December 2022, India saw its first settlement of foreign trade in rupee with Russia – as part of the ‘International Settlement of Trade in Indian Rupee’. Since then, India's rupee has an increasing trend of trade. Recently, 18 countries, including the UK, Germany, Russia, and even the United Arab Emirates, have been given permission to trade in Indian rupees. Bangladesh is the latest addition to this list as the 19th country. As the globalprocess of de-dollarization increases, so does the ‘internationalisation’ of the rupee.

Russian ruble and Chinese yuan are already gaining popularity as international currencies to counter Western sanctions and monopoly of dollar. The BRICS countries have also decided to launch a single currency, with many non-BRICS countries also showing interest to subscribe it as a medium of cross-border trade.

This decision of Bangladesh is based on the economic experience of the last one and a half years, which is still prevailing. This implies Bangladesh's intention to reduce its dependence on USD. The central bank had to sell more than $20 billion dollars of its net forex reserves over the last two financial years due to an imbalance in the forex market. The taka has depreciated by more than 30 percent against the US dollar over the last couple of years. The diversification of reserves will easethe pressure on the greenbacks’ reserve. In the time of shrinking the greenbacks due to the global factors, every single dollar is important to keep the wheels of Bangladesh’s economy moving. Trade in rupees would make it possible to save around $2 billion dollars in reserve. Also, convenient and cost-effective mechanism would ease the trade process which will contributeto strengthening the economic ties between the two neighbours.

Most importantly, traders would save significant losses as they can open LCs directly in rupee. Traders have welcomed this as it allows them to open LCs in rupees for a significant portion of import-export from India without the use of any third currency like the Dollar. Also, Bangladeshis travel to India for various purposes are also seeing it as a boon. As transactions worth about around $2 billion will be settled in rupee and taka, there is no risk of trading due to the deficit as forecasted before.

Authored By: Abdullah Sadi

Abdullah Sadi, is a researcher on South Asia's political economy and international politics.

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