Bangladesh and India are set to start using the Indian Rupee to carry out bilateral trade transactions. Exporters will get export proceeds in rupees, after launching of the initiative from July 11. The move is a breakthrough for Bangladesh as the country is seeking to cut US dollar dependency as its foreign exchange reserve is fast falling due to various global factors.
Since the beginning of the Russia-Ukraine war, the surging exchange rate of the dollar and higher import costs caused the country inflationary crisis. Amid the volatile condition, like other developing countries, Bangladesh's foreign exchange reserves have been decreasing. Since then, to deal with the crisis relaxing pressure on the USD, discussion of trading in local currencies came to light.
Though initially the Bangladesh Bank had indicated that trading in local currencies between the two countries may start in September, the countries now changed the decision from trading in taka-rupee to trading only in rupee. During the ministerial meeting of the two countries in December last year, a proposal was made to conduct commercial transactions in rupees. The matter was then raised in the meeting of the National Economic Council of Bangladesh in March. The State Bank of India last year asked its exporters to avoid dealing in dollars and other major currencies with Bangladesh. It is mentioned in the report that this step was taken to prevent the reduction of Bangladesh's reserves.
Later, a delegation from India visited Bangladesh in April this year and discussed the mode of commercial transactions between the two countries in taka and rupee. To conduct the transactions in local currencies, banks from both countries would have to open accounts - known as vostro and nostro accounts in global accounting - in the banks of other countries to facilitate cross-country transactions. People importing goods from India would have to be able to add Indian rupee to their accounts. Similarly, Indians would also be able to add Bangladeshi taka for payments in Bangladesh.
According to the Bangladesh central bank, the method of transaction was supposed to be launched as a pilot programme through Bangladesh's Sonali Bank, Eastern Bank, and India's ICICI and State Bank of India. Now trading will be taking place only in Indian rupee from this July with slight change in the policy. The Eastern Bank and the country office of SBI in Bangladesh have already opened nostro accounts with Indian ICICI Bank and SBI after getting approval from the RBI. Sonali Bank will open the account as soon as possible.
Bangladeshi exporters will now receive export payments in rupee and importers can open LC in rupee, too. Bangladesh imports $14 billion worth of goods from India against $2 billion worth of exports annually. Considering the huge trade deficit, importers would be able to spend only the equal amount of rupees coming from export earnings. However, the two countries have also introduced the system of payment in both rupee and taka for transactions which will start from September this year, as mentioned earlier. But this won't be applied for export-import payments. This would be possible through a debit card dubbed "Taka Pay Card", which will enable customers to withdraw either rupees or taka.
The borrowers would be able to pay for domestic purchases with taka with the benefit of spending in Indian rupees up to $12,000 in rupees while visiting India. The exchange rate will be calculated from Taka to Rupee or Rupee to Taka. 6 per cent conversion expenditure loss will be saved as there is no need to convert taka to dollar and then dollar to rupee. This will benefit millions of Bangladeshi people visiting India for various purposes including medical care, tourism, and religious reasons.
Since 2022, India emerged as one of the fastest-growing economies in the world. The Indian economy continues to remain robust and stable despite instability in the global macro economy and rising risks to financial systems. The annual export and import volume crossed $400 billion and $560 billion respectably in 2021.
The trend of using local currencies in foreign trade has increased all over the world, following the economic repercussions of Russia-Ukraine war. In December 2022, India saw its first settlement of foreign trade in rupee with Russia- as part of the 'International Settlement of Trade in Indian Rupee'. Since then, Indian rupee has an increasing trend of trade. Recently, 18 countries, including the UK, Germany, Russia, and even the United Arab Emirates, have given permission to trade in Indian rupee. Bangladesh is the latest addition to this list. As the global process of de-dollarisation increases, so does the 'internationalisation' of the rupee.
Russian ruble and Chinese yuan are already gaining popularity as international currencies to counter Western sanctions and the monopoly of the dollar. The BRICS countries have also decided to launch a single currency, with many non-BRICS countries showing interest to subscribe to it as a medium of cross-border trade.
The decision of Bangladesh is based on the economic experience of the last one and a half years, which is still prevailing. This implies Bangladesh's intention to reduce its dependence on USD. The central bank had to sell more than $20 billion dollars of its net forex reserves over the last two financial years due to the imbalance in the forex market. The taka has depreciated by more than 30 per cent against the US dollar over the last couple of years. The diversification of reserves will ease the pressure on the greenbacks' reserve. In the time of shrinking the greenbacks due to the global factors, every single dollar is important to keep the wheels of Bangladesh economy moving. Trade in rupees is expected to save around $2 billion dollars in reserve. Also, convenient and cost-effective mechanism would ease the trade process which will contribute to strengthening the economic ties between the two neighbours.
Most importantly, traders would save significant losses as they can open LCs directly in rupee. Traders have welcomed this as it allows them to open LCs in rupees for a significant portion of import-export trade with India without using the dollar. Also, Bangladeshis traveling to India for various purposes are also seeing it as a positive move.
Abdullah Sadi is a researcher on South Asia's political economy and international politics.
sabdullah04.boston@gmail.com