Little hope for recovery of Rupee’s exchange value soon amidst surging trade deficit and high inflation

The best way to stabilise the Indian Rupee is to contain inflation and imports. Simply put: the inflation rate should be below four per cent and the country’s massive annual trade deficits need to be reduced to zero. The country should totally focus on making goods in India to reduce avoidable imports and try to push up exports — from farm products to manufactured items.

The Reserve Bank of India’s so-called "conscious effort to internationalise the Rupee” by encouraging global trade payments in Rupee may be of little use if the country’s imports continue to far exceed exports and the central bank shies away from raising bank rate substantially to control inflation.

RBI seems to be under a kind of political pressure against raising bank rates. As a result, the exchange value of Indian Rupee vis-a-vis US$ is expected to fall further in the coming months.

Additionally, continuing ‘hot money’ outflow from India’s stock market is adding to INR’s woes. Foreign portfolio investors sold shares worth over $22 billion in the first five months of this year. Their investments in India’s secondary market were facilitated by the government, SEBI and RBI to artificially bolster the stock market and RBI’s foreign exchange reserves.

Last week, RBI detailed a broad framework for cross-border trade transactions in Rupees. It wanted the settlement of trade transactions under this arrangement to take place in Rupees. The mechanism is designed to "promote growth of global trade with emphasis on exports.”

In a statement, RBI said: "In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.”

Will RBI explain what exactly it wants from the country to export beyond what it is already doing? What will the countries exporting to India do with large surplus Rupee funds at their end? Won’t that have a negative impact on the exchange value of the Indian currency and its further downslide as it is happening now against US$?

The Rupee trade is nothing new to India. Thanks to the former Soviet Union, the bilateral trade was practiced rather hopelessly with India exporting mostly low-cost items like leather products, apparels, soaps and detergents, photocopiers, business machines and spectacle frames among many others.

Ironically, IBM and Rank Xerox of the USA used their Indian outfit to indirectly export their products to the USSR as the export of those machines to Russia was banned by the US. The USSR exports to India were high-value defence products and heavy engineering items.

Even liner shipping (India-Black Sea trade) and all other commercial transactions covering insurance, freight, port charges, storage and forwarding expenses and bunkering were shared. There used to be huge Rupee trade surplus for Russia, year after year, and the country did not know how to get it adjusted.

Under the current Western and Japanese sanctions, Russia is now forced to accept Rupee payments to push up its exports to India. In 2021-22, India’s bilateral trade with Russia was worth only $13.1 billion with India carrying a trade deficit of $6.61 billion.

Earlier in the 1960s, Indian Rupee was also accepted in some Gulf countries such as Qatar, the UAE, Kuwait and Oman. India also had payment agreements with East European countries and the rupee was used as a unit of account under these payment agreements.

However, these arrangements did not last long. They had to be terminated. RBI may have forgotten or ignored India’s previous experience in conducting international trade in Rupee.

The central bank seems to have missed the basic point that India’s export-import basket is now heavily tilted towards imports. India has a trade deficit with as many as nine out of the country’s top 10 bilateral commerce partners. The largest trade deficit is with China. Of the 10 top trade partners, India has a trade surplus only with the US. The present government’s ‘Make-in-India’ programme has apparently failed as the cost of manufacturing in India is much higher than import cost.

India’s massive annual trade deficit has been a concern for many economists. However, for unknown reasons, the government hardly talks about the subject.

The general impression that the country’s growing dependence on imported petroleum is principally responsible for the trade deficit is far from the truth. Oil import covers only 15 to 20 percent of India’s annual import bill. Even in 2021-22, the country’s oil import cost was below 20 percent of the overall merchandise import bill of US$ 610.2 billion — the highest ever.

As usual, the Union Commerce Ministry avoids details on imports. The import numbers were not mentioned even in its press release. Last year, India imported 212.2 million tonnes of crude oil — up from 196.5 million tonnes in the previous year. Yet, this was lower than the pre-pandemic oil import of 227 million tonnes in 2019-20. The expenditure on oil imports in 2019-20 was US$101.4 billion.

Since the present government came to power, India’s annual trade deficit continued to surge heavily, barring in 2016-17 and 2020-21. The country’s trade deficit in 2015-16 was $130 billion. It went up to $160 billion in 2017-18, $180 billion in 2018-19 and, last year, over $192 billion. Incidentally, India’s total trade deficit with China hit an all-time high at $77 billion as imports from China surged to over $103 billion, last year.

Is the government really serious about ‘internationalising’ Indian Rupee? Inflation-hit, import-led India appears to be hardly ready for that. To be an international currency, INR has to be accepted by a number of countries as a medium of exchange for trade. It has to be a stable currency and treated as an asset. INR needs to become a currency in which assets are held. INR can be internationalised only when India becomes substantially self-reliant.

Paradoxically, RBI itself has shunned reports about the Rupee-Rouble transaction platform. It has clarified that there is no platform to facilitate rupee-rouble trade although RBI is in discussion with all the stakeholders in the matter. The central bank also mentioned that they are 'sensitive' to the sanctions imposed against Russia by western countries after the Kremlin's Ukraine invasion.

Meanwhile, surging trade deficits and high domestic inflation will continue to make Rupee unstable. There is little hope for Rupee’s exchange value recovery soon.

(IPA Service)

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