New rupee-based trade arrangement between India, Bangladesh will benefit both countries
The new mechanism will also lighten pressure on Bangladesh's foreign exchange reserves, says former Governor of Bangladesh Bank Dr Atiur Rahman
India and Bangladesh, the two friendly neighbours have very recently introduced a new arrangement of trade transactions in Indian rupee. Indian High Commissioner to Dhaka- Pranay Verma, has aptly dubbed this new step as a ‘landmark.’ And the Bangladesh Bank Governor Abdur Rouf Talukder has pointed out that this will slightly lighten the pressure on the country’s reserve. Speaking to Bizz Buzz exclusively, Dr Atiur Rahman, Emeritus Professor at Dhaka University and Former Governor of Bangladesh Bank, decodes this new mechanism and explains how do the two countries stand to gain in the new scheme of things.
Recently Bangladesh and India have initiated a landmark arrangement of trade transactions in rupees. The move is aimed at reducing the dependence on US dollar and strengthening regional currency and trade. How do you see this move?
Before getting into details, I would like to mention here that for the first time, two letters of credit (LCs) were opened in rupees on the launching day of this arrangement. Normally, trade transactions worth $16 billion take place annually between these two countries. A share of this will now be done in rupees. Later, trade in BDT (Bangladeshi Taka) will also be possible.
Initially which are the banks that would deal with this?
Two commercial banks from Bangladesh (Sonali and Eastern) and another two from India (SBI and ICICI) have been brought on board initially. Others will be allowed to join later.
Now coming back to your first question, this innovative trade arrangement was made on the regulation given earlier by the Reserve Bank of India. On 11 July, 2023, the Indian Central Bank had issued a circular related to this historical initiative, which has drawn positive attention worldwide. International commentators have dubbed this initiative a crucial step towards transforming the rupee into an international currency.
So, what are the key features of this new arrangement? What will be the structure like?
The key features of this new arrangement are:
Structure of rupee-based international trade: A foreign bank must operate a Special Rupee Vostro (SRV) account in India. This will require approval from the Indian Central Bank. The SRV will serve as the settlement pool for imports.
Transaction mechanism: Invoices must be issued in rupees for import exports. The foreign currency will be converted to rupees using the market-based exchange rate. Payment will be settled through the SRV pool.
Payment settlement system: The Indian importers will deposit the payments in rupees in the SRV pool. The Indian exporters will be paid for their exports in rupees from this SRV pool. As per the prevailing regulations, exchanges with the same foreign buyer or supplier can be settled via the SRV pool.
Could you please explain it in layman’s language?
To put the entire exercise in simpler words - money received from importers will be used to pay the exporters. Therefore, a net exporting country can trade with India in the SRV mechanism. However, suppose a net importing country (such as Bangladesh) wishes to utilize the SRV mechanism. In that case, it can do part of its trade with India in rupees (the part equivalent to that country’s exports to India). For example, Bangladesh's exports to India are worth around $2 billion annually, whereas Bangladesh's imports from India are worth more than $14 billion. Hence, only a share of Bangladesh’s trade with India worth up to $2 billion can be done using the SRV (the remaining will have to be done using dollar). In that sense, this will only partially relieve our foreign exchange pressure. Yet, this is an innovative move.
How would the new mechanism lighten the pressure on the country’s reserve?
The pressure will be lightened because part of the bills of imports from India can now be paid with export earnings from India. It will reduce the pressure of paying import bills in dollar (via the ACU payment channel) to a limited extent. Bangladesh importers usually rely on import LCs. This is quite expensive as foreign banks confirm payments. Confirmation by Dubai-based or Western banks is becoming more expensive. In this context, going beyond this conventional approach and opting for rupee-based transactions with India will bear some fruit.
Are any other innovative measures like this in the offing?
Economic ties between Bangladesh and India are deepening. And to further bolster this trend, the Bangladesh Bank Governor has informed that by September 2023, national BDT debit card will be launched. And by December 2023, rupee transactions using that card will be possible. With this dual currency debit card, Bangladesh citizens going to India for healthcare, education, and tourism can make payments (within a limit) in Rupees without going through Dollar-Rupee conversion. On the one hand, this will save the additional cost (around 6 per cent) for double conversion (from BDT to USD and then from USD to Rupee). On the other hand, tracking how much Bangladesh citizens spend for healthcare, education and tourism in India will be possible. More importantly, this card will help formalization of the payment and as well as reduce the risk of loss due to theft for Bangladesh citizens who travel to India.
Would these new steps mark the end of dollar-based transactions?
No. It must be noted that initiating transactions in rupees does not mean the end of dollar-based transactions. We must accept whether we want it or not- the dollar will remain the dominant mode of transaction for the foreseeable future. We are to be as creative as possible to reduce pressure on our reserve while accepting the dominance of dollar in the global market.
Do you see any challenges as the two countries start moving in this new direction? How can those be overcome?
Yes, it should also be noted here that some challenges are bound to be there in this new initiative of rupee-based transactions. And we are to strengthen this mechanism by resorting to the ‘learning by doing’ approach. India may also consider a new ‘five-year line of credit’ to Bangladesh to bolster the rupee-based transactions (this could be especially useful for fuel imports). If that can be done, then a significant share of the pressure on our reserve can be relieved. At the same time, trade between the two countries will improve substantially. Also, their ongoing, more robust political-economic understanding will be significantly improved. This will lead to a better standard of living for people across borders.