India's Trade Policy
Trading in Rupees
Why India created a system in 2022 to settle trade in rupees instead of dollars, how it works through special vostro accounts, and what limits its use.
Most of India’s international trade is invoiced and paid in US dollars, even when neither side is American. In July 2022, the Reserve Bank of India set up a framework to let trade be settled in Indian rupees.
How it works
- A foreign bank opens a special rupee vostro account with an Indian bank.
- An Indian importer pays rupees into this account for goods from abroad.
- An Indian exporter can be paid from the same account.
- Balances can also be invested in Indian government securities.
The RBI later made the system easier, allowing more banks and more flexible use of balances.
Why India wants it
- Reduce dollar dependence: less exposure to swings in the dollar and US policy.
- Lower costs: avoiding double conversion through dollars.
- Sanctions: after sanctions on Russia in 2022, rupee trade offered a way to continue trade with some countries.
- Internationalisation: a long-term goal of making the rupee more widely used, which can increase India’s financial influence.
The limits
- Trade imbalances: India buys far more from some countries, such as Russia, than it sells to them. Partners accumulate rupees they cannot easily spend, since they need goods from India or investments in rupees.
- Convertibility: the rupee is not fully convertible on the capital account, so foreign holders face limits on moving money.
- Liquidity: the rupee is traded far less than the dollar or euro.
- Habit: exporters, banks and insurers are used to dollar contracts.
Progress
Many banks from dozens of countries opened vostro accounts, and some trade with countries such as the UAE and Russia has used rupees or local currencies. But the dollar remains dominant in India’s trade.
The bigger picture
A currency becomes widely used internationally when it is stable, freely convertible and backed by deep financial markets. India’s reforms move in that direction, but gradually.
Russian oil exporters paid in rupees found themselves holding large balances they could not easily use, since Russia buys relatively little from India. This showed how trade imbalances limit the use of a currency.
The dollar's dominance rests on deep markets, convertibility and trust. Rupee use is growing slowly from a small base.
- The RBI allowed trade settlement in rupees from July 2022.
- Foreign banks use special rupee vostro accounts with Indian banks.
- India wants to reduce dollar dependence and internationalise the rupee.
- Trade imbalances, convertibility limits and habit restrict its use.
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