By Our Correspondent
NEW DELHI – India’s agreement with the United Arab Emirates (UAE) for rupee-dirham transaction signed recently during Prime Minister Narendra Modi’s stopover in Dubai while returning from his visit to France depicts his one-upmanship without proper homework and research by financial experts. The ruling BJP expects that the pact will help in increasing the circulation of rupee in the Gulf region as well as in internationalisation of the Indian currency.
Two memorandums of understanding between the Reserve Bank of India and the Central Bank of the UAE were signed in the presence of Mr. Modi. Financial experts in India feel that the agreement will lead to complications in formulating the country’s monetary policies and put the domestic financial markets at the risk because of their inability to absorb external shocks. Mr. Modi’s ill-advised penchant for “internationlisation of rupee” without price stability will increase Indian currency’s vulnerability to external factors, which are not in his control.
UAE President Sheikh Mohammed Bin Zayed Al Nahyan was also present during the exchange of the MoUs. In addition to sophisticated financial markets, the most important prerequisite for internationalisation of a currency is price stability. The first agreement between the RBI and the UAE Central Bank will establish a framework to promote the use of local currencies for cross-border transactions, while the second MoU is aimed at interlinking their payment and messaging systems.
The two leaders expressed their interest in strengthening cooperation in the payment systems area by enabling integration between cross-border transactions between the UAE and India more efficiently. Integration between these systems will enhance access to payment services for the benefit of the citizens and residents of the two countries, a joint statement issued on the occasion said.
The two agreements between the two central banks came in the wake of Indian entities commencing payment in Chinese Yuan to Russian energy majors and are likely to enhance the trend of doing business in local currencies which has gained greater acceptance since the beginning of the Ukraine crisis in February 2022. Interestingly, this was Modi’s fifth visit to the UAE since he became Prime Minister.
The trade between India and UAE has increased to 85 billion U.S. dollars in 2022 and the UAE is India’s third-largest trading partner for 2022-23 and India’s second-largest export destination.
Modi’s discussions with Al Nahyan also included the agenda of the groupings such as the I2U2 (India, Israel, UAE and USA) and the UAE-France-India trilateral cooperation under which both sides are in collaboration with other powers.
Modi is said to have taken the decision on rupee-dirham transaction against the backdrop of geo-political tensions and global economic currents, including the U.S. sanctions on the use of dollar for transactions with Iran and Russia. In view of the continuous weakening of the rupee, Modi probably wanted to promote the growth of global trade with an emphasis on Indian exports and invite the attention of global trading community in rupee.
Though the internationalisation of rupee may lower transaction costs of cross-border trade and investment operations by mitigating the exchange rate risk, it is going to create complications in terms of formulating the monetary policy. The factors which will make an impact on trade transactions in the local currencies include political and economic relations, availability of goods, quality, competitive pricing and exchange rates.
None of these factors has been taken into account while signing the MoUs. On the other hand, the dollar’s proportion of global invoices is currently 4.7 times more than its share of global imports, making the dollar’s value considerably more important than bilateral exchange rates for forecasting cross-country trade flows. In view of this, the efforts for exchange rate stability and a domestically oriented monetary policy are going to create more challenges in future.
Vaishali Basu Sharma, an analyst of strategic and economic affairs who earlier worked as a consultant with the National Security Council Secretariat, pointed out that the RBI had already warned that the internationalisation of rupee could potentially limit its ability to control domestic money supply and influence interest rates as per the domestic macro-economic conditions. RBI Deputy Governor T. Rabi Sankar had said in October last year that these risks were unavoidable if India wanted to become an economic power.
“If a substantial portion of its trade is in rupee, non-residents will hold rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools,” Sankar had said. In the prevailing global atmosphere of trade protectionism and geo-political rivalries, promoting invoices in rupee with various countries is not going to be an easy task.
Indian private banks with an exposure in the U.S. are also worried about getting involved in trade transactions with Russia. Efforts to internationalise the rupee will be viewed as a move towards “de-dollarisation” as part of the global campaign to decouple international trade from the U.S. dollar.
The effort may indirectly affect the services sector for which India is dependent on the developed markets like the U.S. and Europe.
India’s share in global trade is not significant enough and the country is overwhelmingly dependent on the import of fossil fuels, edible oils, gold, silver, etc., making it unlikely that the exporting countries will consider the Indian rupee as an invoicing currency, unless it suits their interests. India will need to increase its exports and imports to make the rupee a highly tradable currency and carry out some major reforms for strengthening financial markets in order to manage the large-scale capital flow.
The UAE Ambassador to India, Abdulnasser Alshaali, has said that while there was no agenda to “de-dollarise” the global economy, the deal will significantly ease the path of trade between the two countries by lowering transaction costs and making it easier to convert the currency. Alshaali said the conversation about what would be the “currency of the future” was changing, while India as a host of the G20 could see and count on the UAE as a true strategic partner.