Why India needs bilateral currency settlements
Following the agreement with the UAE and Indonesia, India plans to introduce bilateral currency settlements with countries in Africa and Latin America. The main purpose of such an initiative is to boost trade and strengthen the local currency.
According to Moneycontrol, the Indian government is actively working to reduce the rupee’s dependence on the dollar exchange rate. To this end, the central bank is implementing many programmes, including the introduction of bilateral settlements. The regulator plans that the new approach will attract foreign capital and facilitate transactions in local currency. The Indian authorities see Brazil and Argentina as their main partners in Latin America. These are the countries with which they are primarily negotiating the adoption of the new payment system. In Africa, the government is focusing on working with Tanzania, Senegal and South Africa.
India’s plans to expand settlements
The Indian regulator plans to focus on small states where it will be easier to implement rupee settlements. It is worth noting that India has long been a trading partner with a number of countries where it plans to introduce the initiative. As of fiscal 2022-2023, the country’s trade balance is as follows:
– with Brazil – USD 3.3 billion;
– with Tanzania – USD 1.4 billion.
The authorities hope that cooperation with these countries will continue in the future. At the same time, India is extremely cautious in its choice of partners. The main factor is the potential for further expansion of trade. In addition, the authorities are assessing the possibility of maintaining a balance between exports and imports. The Latin American countries with which they intend to conclude bilateral agreements have a trade surplus in one case and a deficit in the other.
When choosing a partner country, it is also important to understand the type of products being bought and sold. For example, Senegal is a major importer of Indian rice, petroleum products, pharmaceuticals and other products. India, in turn, buys fertiliser and cotton from South Africa and edible oils from Brazil and Argentina.
Notably, in July 2023, the state signed an agreement with the UAE to settle trade transactions between the countries in rupees and dirhams. In addition, the Indian government is negotiating the organisation of bilateral settlements with Indonesia. It is also considering cooperation with Vietnam, which is among India’s top five trading partners in Southeast Asia.
The RBI is also exploring the feasibility of bilateral arrangements with neighbouring countries such as Sri Lanka and Bangladesh. For the time being, however, the priority for these countries is to address their foreign exchange shortages.