Extending export credit in rupee can boost its acceptability: Experts

However, the rupee can truly become internationalised only when it becomes freely convertible on capital account, they say

While the Reserve Bank of India came up with an arrangement to settle trade transactions in rupees to manage pressure on the currency, extending rupee-denominated export credit lines could boost its acceptability in the international market in the long term, said experts.

Venkat Nageswar Chalasani, financial advisor and member, Board of Trade of commerce ministry, said the country is already supporting countries like Sri Lanka and Maldives, and may soon extend rupee-denominated export credit lines to them. This step could help internationalise the Indian currency.

While this idea (export credit lines in rupee) indeed makes sense for the long term, it will be relevant and useful when the Indian unit becomes freely convertible on capital account. At present, the rupee is partly convertible, said a senior public sector executive involved with trade finance.

Referring to the relevance of such arrangements, an official with Export Import Bank of India said if the country is giving rupee lines of credit, then the recipient country also has to repay in rupees. For they they need to hold Indian currency reserves. That can only happen with countries with which India has a trade deficit.

Then comes the issue of determining the exchange rate (rupee vs currency of the recipient country) as many currencies are not widely traded in the market. Unless the currency becomes fully convertible on capital account, such assessment will remain a challenge, he pointed out.

According to Exim Bank India has a portfolio of 310 Government of India-backed lines of credit (LoC) with commitments aggregating $31.96 billion. They are at various stages of implementation. With ever expanding reach, the LoCs have gained momentum in stimulating economic growth across 66 countries in Africa, Asia, Latin America, Oceania and the CIS region. Also under the Buyers’ Credit-National Export Insurance Account (BC-NEIA) portfolio till date, Exim Bank has sanctioned $3.01 billion for 34 export projects.

Rao said there is also scope for attractive pricing if the rupee is accepted as invoice currency. For this to gain traction, a certain amount of subsidisation could be considered. Of course, this needs to be worked out without violating any global trade practices. Providing ample liquidity in the spot, forward and derivatives markets through certain banks is important to get benefits from such arrangement, Rao added.

Beyond ironing out near-term regulatory and operational requirements, market observers expect this mechanism to facilitate trade with neighbouring countries, trading partners that are unable to access dollar funds and are temporarily outside the international trading mechanism, and those looking to broaden their pool of trade settlement currencies.