What is the significance of the government’s recent push to facilitate international trade in Rupee, as opposed to the Dollar? What more needs to be done to conserve forex reserves?

Except for countries like Nepal and Bhutan, a company’s exports and imports are currently always made in foreign currency, particularly the dollar.

International trade in domestic currency:

• By establishing a Vostro account in India, bilateral transactions will now be conducted in rupees. This will enable payments to be made to Indian exporters in rupees rather than USD. 
• It is not a novel idea, though. India has already conducted rupee trade with Iran, and it now plans to do so with other nations including Sri Lanka, the Maldives, Russia, etc.

Benefits:

• The loss of foreign exchange reserves will be lessened by international trading in rupees. 
• Reducing reliance on dollars.
• To some extent, assist in halting the rupee’s decline. 
• To foster the growing interest of the international trading community in the INR and to encourage the expansion of global commerce with a focus on Indian exports.

Limitations:

• Regarding trading with Russia, there are geopolitical risks. Despite the restrictions, Russia has emerged as India’s largest oil supplier. This may cause geopolitical concerns. 
• In terms of trade with Russia, India imports more than it exports. Too many rupees would remain unused in the Vostro account as a result of this trading imbalance. 
• Due to the rupee’s weaker credibility compared to US dollars, not all nations may accept to trade in that currency.

Way forward:

While reducing reliance on the dollar and exploring bilateral trade possibilities by paying/settling in local currencies is good economics, it cannot replace India’s need to export more. The plan will only be successful if Indian exports increase.

Topics: GS-III: Indian Economy Issues Relating to Planning • GS-III: Economic Growth Development