[ad_1]
Countries proposing rupee-rouble or yuan-rouble trade to bypass Western economic sanctions on Russia for invading Ukraine are an opportunity for the internationalisation of the Indian currency, according to a report by State Bank of India (SBI).
Internationalisation means a currency can be freely transacted by both resident and non-residents, and be used as a reserve currency for global trade.
“An interesting anecdote, the hegemony of US $ appears likely to continue in next few decades, notwithstanding the alternate settlement mechanism being envisaged by select nations desirous of continuing inter-territorial trades of compulsory nature, circuiting around the western sanctions as backdoor talks gather momentum for rupee-rouble or yuan-rouble settlements globally, with some enthusiasts betting for gold settlements too!” said Soumya Kanti Ghosh, group chief economic adviser at SBI, in the report.
“This, however, should present the moment of reckoning for the internationalisation of rupee too, underpinning the need to evolve alternate payment and settlement mechanisms. Let us grab the iron when it is hot!” said the report.
Sanctions imposed by the United States, European Union and their other western partners have cut off Russia from the Swift Payment system and bust Moscow’s trade with other countries.
Russian deputy prime minister Alexander Novak last week spoke to Minister of Petroleum minister Hardeep Singh Puri and offered more oil to India. “The parties discussed current and potential joint projects in the fuel and energy industry and noted that current projects continue to be steadily implemented,” the Russian government said in a statement. Russian firms are also offering huge discounts for crude oil to India.
The Reserve Bank of India’s (RBI) Currency and Finance report last year said that the internationalisation of the rupee is “inevitable” but that would complicate monetary policy.
Internationalisation can lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk, but “makes the simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy more challenging, unless supported by large and deep domestic financial markets that could effectively absorb external shocks”, said the RBI report.
The SBI report said that the central bank has been active in the foreign exchange market and actively propping up the rupee after it came under pressure after the Russia-Ukraine conflict intensified.
The rupee hit an all time low earlier this month as it headed close to 77/$ levels.
“Simultaneously, with foreign exchange intervention of the RBI now a part of inflation targeting, the rupee has largely remained devoid of serrated volatility. This has worked favourably with rupee having an appreciating bias that has helped to contain the imported inflation in check,” SBI said in its report.
The report recommended that the central bank may look at intervening in the NDF market instead of the onshore market through banks during the Indian time zone.
“This has the benefit of not impacting rupee liquidity. Also, majority of the USD buying in onshore market follows offshore market, either for view-based trades or arbitrage. Directly intervening in the NDF market will reverse the arbitrage,” it added.‘Moment of reckoning’ for Indian currency as countries look to circumvent West’s crackdown on Moscow, says research.
[ad_2]
Source link