The RBI is aiming to de-dollarize global trade and the Indian economy, Motilal Oswal Financial Services said in a report.In another move aimed at supporting the currency, the RBI allowed international trade settlement in INR on Monday.
"In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in INR," the press release issued by the RBI stated.
While this seems like a welcome initiative, we believe that it is a long drawn process and is likely to play out fully over decades.Implementation of this process will require extensive deliberations with trading partners.
The success of this measure will depend on how many of them are willing to trade in the INR.There is a possibility that if India asks for its import settlement in INR, the trading partner may ask for its import settlement in its local currency, which indicates that RBI, along with other central banks, will have to hold their foreign exchange reserves in many currencies.
If so, it could further increase volatility and fluctuations in the currency market, the report said.Foreign exchange reserves held with the RBI comprise four components foreign currency assets (FCA), gold, Special Drawing Rights (SDR), and reserve tranche position (RTP) with the International Monetary Fund (IMF).
On an average, 93 per cent of total foreign exchange reserves constitute FCA. The latter is maintained with the RBI as a multi-currency portfolio comprising major currencies (such as the US dollar, Euro, Pound sterling, and the Japanese yen), and is valued in USD terms.
This move can also help reduce the effectiveness of US sanctions recently imposed on Russia on account of its invasion of Ukraine, or sanctions imposed even otherwise. If the INR has to play an international role, it needs to be more freely determined.