The Reserve Bank of India (RBI) has recently permitted banks from 18 countries to open Special Vostro Rupee Accounts (SVRAs) to settle payments in rupees. This means that these banks can now use rupees as a medium of exchange for international trade transactions with India. This decision is expected to boost India’s exports and help avoid wartime international sanctions. Vostro accounts are accounts a bank holds on behalf of another, often a foreign bank, and this forms a key part of correspondent banking.
This is a big deal because it has several advantages:
1. It will reduce foreign currency risks for traders and help navigate payment hurdles in trading with countries under sanction, such as Russia. The rupee can now be used to pay for Russian oil or Iranian gas without violating US sanctions.
2. It will also reduce demand for dollars and ease pressure on India’s current account deficit and foreign exchange reserves. India is one of the largest importers of oil and gold, which are mostly denominated in dollars. By using rupees instead, India can save on foreign exchange outflows and diversify its currency basket.
3. It will enhance India’s economic clout and soft power in the region and beyond. As a rising global power, India needs a strong currency that reflects its economic potential and geopolitical influence. By promoting rupee trade, India can increase its financial integration with other emerging markets and developing countries, especially in South Asia, Africa and West Asia.
While there are several advantages to the Reserve Bank of India’s decision to allow banks from 18 countries to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian rupees, there are also some challenges and risks involved in this process:
1. It will expose India’s financial system to greater volatility and speculation. As more non-residents hold and trade rupees, they may create fluctuations in their value depending on their demand and supply. This may affect India’s monetary policy autonomy and macroeconomic stability.
2. It will require India to liberalize its capital account and make its financial markets more open and transparent. To attract foreign investors and traders to use rupees, India has to ease restrictions on capital flows, improve market infrastructure, strengthen regulatory oversight and enhance governance standards. This may entail significant reforms that may face political resistance or social backlash.
3. It will also entail competition from other currencies that are already well-established or aspiring to become global. The US dollar remains the dominant reserve currency in the world, accounting for more than 60% of global foreign exchange reserves. The euro, yen, pound sterling and renminbi are also widely used for trade and investment purposes. To challenge these currencies’ dominance or co-exist with them peacefully, India has to offer better incentives, services, products, innovation, security, trustworthiness, etc. than them. This may require considerable resources, efforts, coordination, cooperation, etc. from various stakeholders within India as well as outside it.
The Reserve Bank of India’s decision to allow banks from 18 countries to trade in rupees is a welcome step towards making Indian currency more global. However, it is not an easy task or a quick fix. It requires a long-term vision, a comprehensive strategy, a gradual approach, a balanced assessment, constant monitoring, etc. from both policymakers as well as market participants. If done well, it can bring many benefits to India’s economy as well as its diplomacy. If done poorly, it can create many problems for India’s stability as well as its sovereignty.
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