International Trade With Rupee & Global Debt stress

The Reserve Bank of India has taken a decision to allow the invoicing and payments for International Trade with rupees instead of dollars. Why the RBI has been taken this decision and Whether the Rupee for exchange in the International Trade sustain? Whether Our Country shrinking the Forex Reserves and Whether Value of Rupee under control are the questions are arising in the minds of the people. Recently, our country had facilitated oil imports from Russia facilitated stronger bilateral trade where sanctions against Russia had imposed by US and many European countries, it has created hardships in cross border payments due to cut off the payments system. Apart from this, promotion of our products for exports and create positiven atmosphere among the global business entities about the Rupee.

 

 

After careful examination of Sri Lanka financial crisis as a case study, forex reserves for balance of payments are crucial for any country for smooth function of their Economy. When Rjpaksa was elected as the president for this term, Sri Lanka had 7. 50 Billon USD Forex Reserves on hand. But, todays Forex Reserves are available for 50 Million USD only. Apart from dynasty in the Governance with huge Budgetary allocations on hand with the Rajapaksa's family, corrupt practices and misgovernance have been deteriorated the forex reserves causes the default in payment of external debt to the extent of USD 51 Billions and immediately payable USD 7 Billions.

  

 

Keeping in view of Sri Lanka crisis, many experts has been alerted Our Country about external debts for $620.7 Billion with their apprehensions about huge Foreign Capital Outflow due to global economic uncertainty, Raise in Inflation and Rupee depreciation to Dollar. The Union Government had clarified that out of external debt of $620.7 Billion, Union Government's share is $130.80 Billion and it included Special Drawing Right Allocations. it means, 21% of the total external debts share on Union Government liability. There are gobbles propaganda around the debts burden on our country out of control since external debt repayment due for $267 Billion with in a year, but 40% of those debts are pertaining to the Corporations like NHAI which have their own source of revenues as well as monitizable assets. Hence, repayment will not be burden on our country. Further, the Centre's share is 3% only in $267 Billion of external debt is less than $ 8 Billion and it is very much conveniently manageable without any risk. Here, the risk is much concerned pertinent to the the off budget Borrowings of States like Andhra Pradesh without proper monitizable Capital Assets.

Also Read: RBI allows International trade settlement in Indian Rupees (INR) 

 

Many analysts and people have been worried about forex Reserves for future external debt repayments and Rupee depreciation in it's value. As far as existing forex reserves available in our country for $601.057 Billion as on 10th July 2022 though forex reserves dipped for two consecutive weeks, still our country holds the position of 5th rank in the World in Forex Reserves. Further, the worrying factor is the Rupee value depreciation to US Dollar and the Rupee hit Rs.80/- per US Dollar. But, We need to observe the all major countries currencies depreciating their values with Dollar. But, Interestingly Our Rupee has been appreciated with other currencies, other than dollar currency exchange parity has been favoured to our country. Let We need to examine other major currencies with Dollar, One Euro has become equivalent to One US Dollar and if we go back, As on 6th January was one USD was exchange at 0.8102 Euro. Whereas Euro value had stronger than US Dollar prior to Covid19 and it's value eroded due to Russia war with Ukraine in addition to post Covid19 economy uncertainty in Europe and other parts of the world. It is important to note that Germany is the biggest one in the European Union Economy, which had registered Trade deficit first time now since 1991. Interestingly, Our country Rupee value appreciated against to Euro since the beginning of 2022 as One Euro was equivalent to Rs.90 at the beginning, but it is around Rs. 80 now. It should be noticed by everyone that Rupee has done well against Dollar then Euro due to RBI intervention to stable the rupee. Similarly all major currencies like Japan Yen, One USD was equivalent to 108.94 JPY as on 7th December, 2021, it is 138.55 JPY as on 15th July,2022. But, same in the case of One JPY was equivalent to 0.66 Rupee as on 31st December, 2021 and it is 0.58 JPY as on 15th July,2022. In addition to this, One Swiss Francs ( CHF ) was equivalent to 1.096 US Dollars as on 31st December, 2021 and it is 1.013 USD now. But, in the case of Our Rupee, One Rupee was equivalent to 0.0123 Swiss Francs ( CHF ) as on 2nd December, 2021 and it is 0.12 Swiss Francs ( CHF ) with stable. Hence, Our Rupee though depreciated the Value with Dollar, in contrary Rupee has been appreciating with other currencies due to remedial measures has taken by the RBI on time.

 

Why The Trade Deficit has been increased in our country?, it needs to observe that 85% of our fuel requirements are imported by us and it should be paid in US Dollars, sharp raise in the imported fuel prices, Coal Imports and raise in other imports cause the Trade Deficit for $26.18 Billion in June though exports growth had registered by 23% as against to the raise in imports by 55% over the same period in the last year. Though both exports and imports has been raised significantly, imports are high due to the requirements for latest industrial growth noticed is 19.6% Year on Year, Bank Credit raised at 13.2% PMI for services registered at 59.2 and Both Directirect & Indirect Tax revenues buoyant. The fact is, the imported inflation from energy prices and oil import dependence, there is little India can do about this in short term beyond some domestic adjustments (say cutting taxes at the margin) but all such measures have a price. These are all issues may influence for the forex reserves to clear the payments in the International markets with US Dollars.

Also Read: US inflation hits 9.1%, 41 years high 

 

Astonishingly, Though US inflation touches 40 years high 9.1% like many major economies are facing the similar problem, still US Dollar value has been appreciated across the globe due to demand for US Dollars for settlement of International payments across the globe. Importantly, UN had noticed impact of Russia and Ukraine war on 107 Countries around the world, which faces one of the following three problems or more as 1) Raising Food Prices, 2) Raising Energy Prices and 3) Tougher Financial conditions in the month of March, 2022, out of which 69 Countries face all three risks like Sri Lanka and many developing economies like Egypt, Tunisia, Lebanon, Peru, Argentina, Ghana, Ethiopia, Kenya, South Africa etc will not able to service their debts in next 12 months. As far as India, few States like Andhra Pradesh, Punjab, West Bengal, and so on inching towards debt crisis.

Also Read: India's IIP increased by 12.5% in a month 

 

In this situation, RBI has announced for a mechanism to settling International payments with Rupees in the trade with the countries express their interest to settle their payments. In this Rupees. It means, Exporters receive their money in rupees at the exchange rate on the Date of the transaction and similarly, Importer gets money in Rupee on the day of exchange rate of the transaction. In this process, 1) Both the countries express the interest in Rupee Trade, 2) Both the Countries open specified Bank Accounts in each other, and Both the countries maintain Reserves in Local Currency 3) Foreign Countries pay in their Local Currency and Payments Deposited in their Indian Bank Account, 4) Payments calculated in Rupee based on Market Rates and Banker pay Indian Traders in Rupee. Advantage to India, Dollars will be maintained as Forex Reserves in a healthy manner by increasing the demand for Rupee in the International market to create more demand for rupee, which strengthen the Rupee, Easier Trade between the both agreed countries without US Dollars. Three advantages ahead with International Rupee transactions, Lower Trade Deficit, Value appreciation for Rupee and Sustainable Forex Reserves.