Global multilateral trade is at high risk due to anti-globalisation policies pursued by many countries in the 21st century. The World Trade Organisation (WTO), which is expected to foster multilateral trade, is currently dysfunctional. The underlying causes are many. First, the geo-political disharmony among major countries/trading blocs is prima facie the major inhibiting factor in pursuing a competitive and multilateral trading system. Second, as trade in services is more complex than trade in goods, it is difficult to arrive at a consensus on many issues relating to the former. Third, there is no level playing field among countries as innovations in services trade are progressing much faster and unevenly around the world. All countries are not on the same page in respect of e-commerce, digitisation, cloud computation, blockchain technology, data localization etc. Fourth, emerging and developing countries with a poor voice in global multilateral trade negotiations find it difficult to adjust and hence go for inward-looking trade policies out of compulsion. They typically negotiate bilateral trade arrangements, wherever possible, which is anyway a suboptimal solution.  

The outcome of a hostile cross-border trading environment has been felt on multiple fronts. First, several regional trading blocs have emerged over time at least to have some kind of free trade area/customs union/economic union etc., among the member countries. Second, regional trading blocs have not been very successful due to inadequate institutional arrangements compared to the multilateral trading system – a time-tested global understanding developed over time. Third, the benefits of free trade do not accrue to mankind due to inward-looking trade policies. Fourth, while man-made restrictions are being imposed on the current account transactions, capital flows are relatively more market-driven, which puts undue pressure on the exchange rates, particularly when there is a reversal of capital flows.  Slight volatility in capital flows often magnifies the exchange market pressures as current account transactions are restricted following inward-looking trade policies. 

Besides headwinds emerging from anti-globalisation policies, the recent exchange market pressures have several immediate triggers. First, very few options were available with major central banks but to hike policy rates as inflation was recently several decades high in most parts of the western world. Second, the US dollar was unusually strong following large hikes in Fed rates in quick successions combined with quantitative tightening. Third, the flight to safety has been clearly visible as a global slowdown/recession is inevitable in 2023 following the tight monetary policy being pursued by many central banks. Fourth, the cross-border payment system suffered setbacks partly due to unilateral sanctions imposed by the US. According to the US Department of Treasury, in December 2022, the US sanction was active in as many as 38 countries, including Russia, Iran, Sudan, Somalia, Yemen, Afghanistan, etc. Although the US sanctions are at different levels of intensity, a few of them have been barred from the SWIFT network for cross-border transactions. Being faced with undue hardships, these countries have started searching for alternative ways to settle their cross-border payments, including local currency invoicing.   

An attempt is made here to evaluate the prospect of local currency invoicing as an alternative to dollar invoicing for cross-border trade in general and rupee invoicing in particular. Section II examines the local currency invoicing currently pursued in several parts of the world; Section III explains international trade settlement in the Indian rupee (INR). Section IV evaluates the prospects of such an initiative going forward, including other policy options.

II. Local Currency Trade Invoicing
Many countries and regional trading groups have introduced invoicing, payment, and settlement in local currencies to reduce their dependence on the US dollar (Box 1).

Box 1: Instances of a Few Local Currency Payment Arrangements
> Since 2011, China has gradually shifted from US dollar invoicing to yuan under agreements with Australia, Russia, Japan, Brazil, Iran etc.
> Australia agreed with China to trade in national currencies in 2013.
> Brazil agreed with China to trade in Brazilian real and Chinese yuan in 2013.
> In 2015, China’s International Payment System (CIPS) was launched,which provides an alternative payment system that offers clearing and settlement services for its participants in cross-border Renminbi payments.
> Since the end of 2019, the EU established a special-purpose vehicle (SPVs) to facilitate non-USD and non-SWIFT transactions with Iran to avoid violating U.S. sanctions.
> Since March 2018, China started buying oil in gold-backed yuan.
> On March 31, 2020, the first Iran-EU agreement was concluded, which covered the import of medical equipment to combat the COVID-19 outbreak in Iran.
> India introduced an international trade settlement mechanism in INR in July 2022.

Local currency invoicing/payment has not been very successful in replacing the USD in global trade in a big way. The mighty dollar still dominates globally on multiple fronts. As against the US share in the global trade of around 10%, trade invoicing in USD is above 50%, foreign exchange reserves around 60%, cross-border dollar-denominated loans/debt above 65%, 88% respectively and turnover of forex transactions in USD around 90% in September 2022 (BIS Quarterly Review, December 2022). Although it appears as if there is no rival to the USD, Box 1 reveals that the process of de-dollarisation seems to have gathered momentum after the global financial crisis (GFC). The recent ban on the use of SWIFT payments as a political weapon in enforcing sanctions by the Biden administration would expedite the process of de-dollarisation. Going by the steady increase in global trade invoicing in Yuan, it has the potential, besides Euro, to challenge trade invoicing in the USD going forward.

There are also several hurdles in developing a new world order regarding trade invoicing in local currencies as it is a reactive policy against sanctions, which may work subject to the consent of trading partners. Moreover, exporters would lose the FCCs in case of local currency trade settlement. The incentive structure for both partners may or may not be symmetrical in the local currency payment system.

III. International Trade Settlement in India Rupee

In terms of Para 2.52 of the Foreign Trade Policy (FTP) (2015-2020), “All export contracts and invoices shall be denominated either in freely convertible currency or Indian rupees but export proceeds shall be realized in freely convertible currency. However, export proceeds against specific exports may also be realized in rupees through a freely convertible Vostro account.” In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, “AD banks in India have been permitted to open Rupee Vostro Accounts”.  Approval is required from RBI for opening Special Rupee Vostro Account (SRVA).

Currently, India has rupee trade with Nepal and Bhutan; an Asian Clearing Union (ACU) mechanism for Bangladesh, Pakistan and Maldives; FCC and ACU mechanism for Myanmar and bilateral trade agreements with several countries like Iran, Russia, Sri Lanka etc. India has precedents of having rupee trade with Russia under a bilateral arrangement.

The local currency invoicing introduced recently in India is extended to all countries willing to participate under the new scheme. The highlights of the new scheme are given in Box 2.

Box 2: Highlights of Rupee Trade Invoicing
* For all new contracts, post-July 11, 2022, all exports and imports under this arrangement may be denominated and invoiced in INR.  
* The exchange rate between the currencies of the two trading partners may be market determined.
* The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down by the RBI.
* Indian importers shall make payment in INR which shall be credited into the Special Rupee Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.
* Indian exporters shall be paid the export proceeds in INR from the balances in the designated Special Rupee Vostro account of the correspondent bank of the partner country.
* The surplus balance in the Special Rupee Vostro Account can be invested in Govt. Treasury Bills and Govt. Securities.

According to the features mentioned above, the entire process of cross-border trade – invoicing, payment, and settlement – is proposed to be accomplished in INR. As it is open to all countries willing to participate in the new system, the question of discrimination/violation of sanctions imposed by the USA does not arise. Although the new arrangement has the potential to make INR an internationally acceptable currency going forward, it is too early to jump to this conclusion unless the volume and value of such transactions assume a significant proportion. The government feels that responses to such a scheme are encouraging. A few countries, particularly those that have less foreign currency/US dollar reserves or are under US sanctions have responded to reduce their dependence on the greenback. India will also benefit, at least in the short-run as demand for the USD would be less for payment of essential imports like crude oil/fertiliser etc. However, the scheme may not be equally beneficial to both partners. India is likely to pursue this arrangement with countries with whom it has a trade deficit that leads to a surplus balance in the Rupee Vostro Account, which can be invested in Indian sovereign papers. The trade surplus countries may continue to remain in such a trade arrangement so long as they are either on US sanctions or returns on Indian sovereign papers are more attractive than the opportunity costs of losing the FCC/foreign exchange reserves.

IV. The Way Forward

The assets available in other FCCs are limited. Although it will take a long time to replace the US dollar in global trade, efforts are being made on multiple fronts to reduce its dominance. Many countries are trying to diversify their composition of foreign exchange reserves subject to the availability of such assets. Many central banks are buying gold as part of foreign exchange reserves. Local currency invoicing is certainly an option for low-income countries with fewer dollar reserves. Alternative payment systems, other than SWIFT, have been developed by many countries for facilitating cross-border trade.

Mention may be made about the introduction of central bank digital currencies (CBDCs), at least on a pilot basis by many countries. As soon as CBDCs are put to common use on a full-fledged basis, currency conversion will be the least expensive. Moreover, cross-border payment and settlement systems in CBDCs will be more efficient than SWIFT. Currently, the BIS is working on the global settlement of cross-border transactions through CBDCs for its member countries. 

The Indian rupee was under pressure in 2022, although the impact of capital flight on the Indian rupee was relatively less than many other currencies. Volatility in the exchange rate has been partly managed by RBI through forex market interventions, as and when required. The bulk of the loss of India’s foreign exchange reserves, more than 65%, was due to valuation loss. Although India’s monetary policy is primarily designed to address domestic problems, recent repo rate hikes by the RBI incidentally contributed at least partly to the capital outflow. India did not pursue capital control as a policy option to reduce capital flight. Rupee trade invoicing, introduced at an opportune time, may be useful to many countries. India will get an opportunity to diversify its direction of trade to many small countries, hitherto not very important historically. If the Rupee Vostro Account balance remains large, India should allow the balances to be invested in alternative domestic financial assets, within permissible limits for non-residents.

*The writer is currently RBI Chair Professor at Utkal University and former Head of the Monetary Policy Department, RBI.   


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