The Future Of India's Efforts To Trade In Local Currency
De-dollarization has increasingly become a substantive topic of discussion. The hegemony of the dollar has come into question in recent times due to geoeconomic, geopolitical and geostrategic shifts.
Albert Einstein had famously said that problems cannot be solved using the same mindset that created them. He had also said that changing the world requires changing our thinking. The Indian leadership has repeatedly shown a willingness to modify its approach to solving problems arising from economic shifts and global events.
India has often opted for pragmatic adjustments to serve its national interests. Some outstanding examples are the 1991 economic reforms, the 2016 demonetization, and the response to the 2019 COVID pandemic. Another good example is the way India is promoting its international trade in local currency.
The US dollar is the most widely used currency for trade and other international transactions. It is also the world’s primary reserve currency. However, de-dollarization has increasingly become a substantive topic of discussion. The hegemony of the dollar has come into question in recent times due to geoeconomic, geopolitical and geostrategic shifts.
De-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback. De-dollarization is most visible in commodity markets, where a large and growing proportion of energy is being priced in non-dollar-denominated contracts.
Brazilian President Luiz Inacio Lula da Silva said that BRICS nations may consider an alternative currency amid tensions with the United States. He reiterated his support for a BRICS trade currency, saying Brazil "cannot depend on the dollar" and must remain open to testing alternatives for trade among member nations.
Lula proposed that BRICS nations begin discussions on creating such a shared trade currency, arguing it would reduce global dependence on the U.S. dollar. India dismissed suggestions that it is working with other BRICS nations towards de-dollarisation and made it clear that de-dollarisation is not part of its financial agenda. India has not actively moved to reduce its reliance on the US dollar.
Instead, the focus is on “derisking” trade by diversifying partners, exploring alternative payment systems, and reducing dependence on a single currency. India's leaders have taken note of the trend towards de-dollarization among other countries and have sought to increase trade using their own currency. India is actively promoting and supporting international trade in its local currency, the Indian National Rupee (INR).
This strategy aims to reduce dependency on foreign currencies including the U.S. dollar, lower transaction costs, mitigate exchange rate risks, and enhance the rupee's global standing. Since 2022, the Reserve Bank of India (RBI) has implemented a mechanism that allows trading partners to settle exports and imports in rupees. This is facilitated through Special Rupee Vostro Accounts (SRVA), which banks from partner countries can open in Indian banks.
The RBI has authorized banks in 22 countries to open SRVAs for trade settlement in Indian Rupees, a move designed to promote the rupee's international use and reduce dollar dependency. This mechanism allows foreign banks to hold INR balances from trade with India, with recent RBI changes removing prior approval requirements to simplify the process and encourage more trade in the local currency.
The 22 authorized countries where the RBI has authorized banks to open SVRAs are Bangladesh, Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kazakhstan, Kenya, Malaysia, Maldives, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom.
By removing the need for prior RBI approval to open these accounts, the process becomes faster, enabling quicker trade settlements. India has forged bilateral agreements with numerous countries, including Russia, the UAE, Sri Lanka, and the Maldives, to enable local currency trade. This has led to successful transactions, such as the first crude oil deal with the UAE using the Local Currency Settlement (LCS) mechanism in August 2023.
Within the BRICS economic bloc, India has advocated for expanding trade in local currencies to enhance economic cooperation and strengthen financial autonomy. Also, India has a long history of INR settlements with South Asian Association for Regional Cooperation (SAARC) member countries like Nepal and Bhutan.
India's drive for local currency trade is motivated by several factors. By promoting the rupee for international transactions, India aims to increase its global footprint and elevate its status as a widely accepted medium of exchange. Local currency settlements help mitigate the risk of foreign exchange fluctuations and insulate the Indian economy from external shocks.
The mechanism simplifies international payments, lowers conversion costs, and provides more flexibility for Indian businesses engaged in global trade. Invoicing and settling in INR can make Indian exports more attractive by eliminating conversion costs.
Western countries have imposed sanctions on Russia, making transactions in US dollars and Euros more difficult and riskier. This is due to severed correspondent banking relationships, restrictions on Russian banks, and a general fear among global banks of enormous fines for violating these sanctions, leading them to cut ties with Russian entities.
India and Russia have implemented alternative payment mechanisms, such as using the Indian Rupee and Russian Ruble for oil transactions. Some oil imports might also involve complex barter systems, where India provides goods or services in exchange for Russian oil.
While some early deals might have used dollars, India has actively pursued non-dollar payment systems to manage the complexity of sanctions and maintain its access to Russian crude. India is diversifying its currency usage in trade with Russia to ensure a continuous supply of oil.
Over 90% of trade between India and Russia is now settled in local currencies, a profound shift that reduces reliance on the US dollar. This has been driven by a fivefold increase in trade volume, reaching nearly $68 billion in 2024–25.
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Due to its significant energy imports from Russia, India has a trade deficit that has led to a large accumulation of Indian rupee surpluses in Russia. Western sanctions on Russia following its 2022 invasion of Ukraine prompted both countries to use a rupee-rouble trade mechanism to bypass restrictions, but the trade imbalance complicated the arrangement.
Until recently, Russia was limited in the way it could use the accumulated rupees. This meant Russian entities had billions of rupees stuck in Indian banks that they could not easily send back home or convert into other currencies. To address Russia's frustration with the growing pile of unusable rupees, both countries and their central banks have explored various solutions.
To balance trade, India has aimed to increase its exports of goods to Russia, including pharmaceuticals, machinery, and agricultural products. This would allow Russian entities to use their rupee reserves to purchase Indian products. Recent data indicates a modest increase in India's exports to Russia, which has helped reduce the overall rupee accumulation.
The RBI amended regulations to allow Russian entities to invest their surplus rupees within India. Russian companies can now invest in Indian treasury bills and government bonds, stocks and other financial instruments and long-term infrastructure and other development projects.
Discussions have been held about using accumulated rupees for exports to third countries, enabling Russian suppliers to use their rupee balances to buy Indian goods for shipment elsewhere. While the initial problem of accumulating rupees caused friction, the investment solutions implemented by the RBI have significantly eased the issue.
Russian entities are now actively deploying their rupee balances into various Indian investment avenues, and India's exports to Russia have risen. However, the rupee's relative weakness and non-convertibility compared to major currencies like the US dollar still make it a less attractive reserve asset for Russia.
The long-term success of the mechanism depends on sustained efforts to balance trade and provide attractive investment opportunities. Summing up, while India has officially rejected the idea of a shared BRICS currency, citing economic and geopolitical concerns, it promotes local currency trading.
However, challenges remain, such as dealing with a trade deficit with countries like Russia where rupee surpluses accumulate. The rupee's relative weakness and capital account non-convertibility compared to major currencies like the US dollar still make it a less attractive reserve asset for Russia.
The RBI and the government restrict capital flows to maintain monetary policy and protect the economy from excessive volatility. The long-term success of the mechanism depends on sustained efforts to balance trade and provide attractive investment opportunities.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
