Trade in local currency: Govt. to take steps to strengthen Rupee

The Government is exploring alternatives to RBI intervention to stabilize Rupee. One of the major ways for this is to trade in local currency rather than dollar. India has huge trade deficits with China and oil exporting nations like Iran, Venezuela, and Russia. Commerce ministry is in talks for barter exchange trade with these countries to save foreign exchange. If these countries agree to trade in local currencies, it will strengthen exchange rates of their currencies in comparison to dollar. “The possibility of rupee or barter trade with countries from where India is buying crude oil such as Iran, Venezuela and Russia is also being considered,” said a commerce ministry official.

Commerce minister Suresh Prabhu chaired a meeting to take steps to stabilize the downfall of Rupee for long term. For this, the ministry considered options of increased exports, reduce imports through hike in tariffs, and local currency/ barter trade to stabilize rupee. Prabhu asked eight departments including economic affairs, petroleum, steel, coal, electronics and information technology and pharmaceuticals to ramp up production so imports could be rationalized. “Directed key ministries to examine measures on diversification of export base and increase domestic production in order to promote economic growth and address our merchandise trade deficit,” Prabhu tweeted. 

China is the largest trading partner of India with a huge trade deficit tilted in favor of China. The total trade of India with China was $84.4 billion in the fiscal year 2017-18. The total imports from China accounted for $68.06 billion while the exports accounted just $16.34 billion. This posts a trade deficit of $51.72 billion which is almost equal to the defense budget of India. The trade deficit with China is so huge that the second largest trade deficit with Saudi Arabia is almost one fourth ($13.93 billion) of that China’s. India has repeatedly told China to seek ways to reduce trade deficit. In negotiation for local currency trade, India has upper hand due to its huge trade deficit with China. However, it will be beneficial for China too because after IMF declared Yuan a reserve currency, dragon is trying to project its currency as an alternative to debt ridden American dollar in global markets.

India’s Current Account Deficit (CAD) has widened to four year high to 2.4% of gross domestic product, or 14.3 billion dollars in April-June quarter. The sharp rise in CAD was due to rising oil prices and increase in electronics import. Rupee has become highly volatile in last few weeks and stock market is also seeing big leaps in both directions every day. Trade in local currency and barter exchange could help India as well as trading national to save foreign reserves. Dollar accounts for 64 percent total known foreign reserves in central banks across the world. Central banks store foreign currency in dollar because it is the dominant medium of exchange for world trade and American market has deep pockets. Many small countries have pegged their exchange rates to dollar.

After financial crisis of 2007-08, many countries started looking for alternatives to dollar. The countries are exploring ways for barter trade and local currency trade to end their dependence on dollar. United States also uses dollar’s domination as bullying tool and to force other countries to follow its will. Non-dollar trade could be solution to many problem countries like India are facing and therefore ministry of commerce is exploring this option.