Rupee settlement is not expected to be used frequently, says Capital Economics

15 Jul 2022 , 03:05 PM

According to Capital Economics, the Reserve Bank of India’s most recent method of settling international commerce directly in rupees, which aims to increase interest in the currency among traders worldwide, is unlikely to be extensively adopted.

“We don’t think the new system will significantly increase the amount of commerce concluded in rupees. Since other currencies are typically more expensive to use, the majority of international commerce is handled in dollars and euros rather than other currencies, Assistant Economist Adam Hoyes noted in a note.

“Making it possible for businesses to settle in rupees won’t always encourage them to do so unless, for instance, international businesses exporting to India have a need to raise their rupee deposits that they are unable to satiate in another manner. Dollars are a more advantageous and affordable alternative for the majority of businesses due to its depth and liquidity.

Hoyes used the example of the renminbi. Despite the fact that since 2010, it has been able to settle trade with China in renminbi, just 17 percent of goods trade actually uses the currency, a decrease from a few years before.

The rupee settlement method might be employed in commerce with Russia even if it doesn’t completely circumvent Western sanctions, according to Capital Economics. The new system will be helpful even if access to roubles for Indian businesses is cut off. Unusually, almost 50% of recent Russian exports to India were paid for in roubles.

However, dealing with a Russian bank or company that has been sanctioned would put an Indian bank at risk of secondary sanctions regardless of the payments channel used, it said. While Russian lenders cut off from the SWIFT messaging system could continue trading with India using ad-hoc messaging arrangements and the rupee settlement channel, it said.

Since the Ukraine conflict, India has purchased more crude from Russia at lower costs, driving up crude oil prices and driving up imports from Russia. Future amounts of commerce over the India-Russia route are anticipated to increase.