The best way to stabilise the Indian Rupee is to contain inflation and imports. Simply put: the inflation rate should be below four percent and the country’s massive annual trade deficits need to be reduced to zero. The country should 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’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 the 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 the Indian Rupee vis-a-vis USD 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 USD 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.
The Rupee trade is nothing new to India. Thanks to the former Soviet Union, bilateral trade was practiced rather hopelessly with India exporting mostly low-cost items like leather products, apparel, 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 defense 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 a 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 USD 13.1 billion with India carrying a trade deficit of USD 6.61 billion.
Is the government 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 several countries as a medium of trade exchange. 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.
