May 2024

IS RUPEE BEING THE NEW CHOICE FOR INTERNATIONAL TRADE SETTLEMENTS??

Commerce and Industry Minister Piyush Goyal announced on March 11 that numerous economies, both major and minor, have shown a keen interest in trading with India using rupees. This development has the potential to significantly transform India's global trade landscape.?

Mr. Piyush Goyal in one of his interviews mentioned the growing significance of rupee in the international market and its advantages but is rupee actually going global? Is rupee actually replacing dollar? Let’s take a dig at this!

It is true that rupee is growing its significance in international trade.

The first payment made in INR was made to UAE while India was importing crude oil. Trade in INR have already commenced with counties such as Nepal and Bhutan. Bangladesh and Sri Lanka are keen on starting immediately. Many gulf and eastern countries are also considering in joining the bandwagon.

But it is not how It seems. Growing significance of INR is beyond question but is rupee replacing dollar? The answer is NO.

Dollar in international market is used as a third currency wherein the trading parties convert their local currency into dollars and then settle their transactions. However in this case the settlement is done in their local currencies thereby posing a challenge to the monopoly of dollar in global market.

Likewise India with other 18 counties are considering in using their local currencies as a medium of trade.?

By trading in local currencies the countries are overcoming many problems like

1. Minimising their transaction cost?
2. Stabilising their currency?
3. Being less dependent on dollar and hence not getting affected by its shortage
4. Booming trade and many more.

India is leaving no stone unturned in increasing the dominance of INR, whether it is including changes in their foreign trade policies (FTP) or introduction of VOSTRO accounts. A vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart. For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer's behalf, the account is deemed by the holding bank as a vostro account of the insurance company. The accounts benefit clients with global banking needs and allow them, through their own bank, to open accounts in other countries as they need. Most Vostro accounts will have the same preferred services as a regular bank account, including foreign exchange transactions, deposits and withdrawals, and money or wire transfers.?

Shifting from a long-going tradition of using US dollars as a medium of exchange to local currency did not happen overnight. It takes a lot of coordination and a great understanding between both trading country’s central banks.

Thank you for being part of our community. Remember, your financial journey is a marathon, not a sprint. Stay tuned for next month's newsletter, packed with even more ways to thrive financially. Until then, keep hustling and making those money moves! ????

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