Share of dollar, euro in Indian trade payments up 30% since 1990s: IMF data

Research shows effect of dollar fluctuations on bilateral trade; RBI mechanism to pay in Indian rupees may help settle trade with Russia and Sri Lanka, remove risks of dealing in greenback

The share of developed market currencies in India’s trade has only been going up in recent decades.

The share is up around 30 percentage points since the early 1990s, shows an analysis of data from the Washington-based International Monetary Fund.

The Reserve Bank of India (RBI) announced a mechanism on Monday to pay for imports and exports in Indian rupees. This will likely help settle trade with countries like Russia and Sri Lanka and remove any risks of dealing in dollars. Russia has been facing sanctions following military action in the Ukraine. Sri Lanka has been facing debt issues that have left it with hardly any dollars to meet its obligations.

Research suggests that a change in the value of the dollar can affect import or export prices between two trading partners, even if the exchange rate between the two remains constant.

“…the relevant predictor for bilateral trade prices and volumes is not the bilateral exchange rate but the dollar exchange rate, even where the U.S. is on neither side of the trade transaction. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle,” according to the 2017 IMF working paper entitled, ‘Global Trade and the Dollar’ from authors Emine Boz, Gita Gopinath and Mikkel Plagborg-Møller.

The share of India export invoices which were denominated in dollars was 57.2 per cent in 1991, shows data from another IMF working paper with some common authors to the one cited above entitled ‘Patterns in Invoicing Currency in Global Trade’ which came out in 2020. The data shows that exports have since shown a rising trend. The latest available data was for 2014. It was then at 86.8 per cent. The euro is another developed market currency which has gained some prominence in Indian exports. It accounted for close to eight per cent of exports as per the latest available data (see chart 1).

The share of developed market currencies in imports shows a similar trend. The dollar accounted for 59.7 per cent of imports in 1991. This was at 89.37 per cent in 2014. The share of the euro was at 7.16 per cent in 2014, though it had reached as high as 12.61 per cent in 2009 (see chart 2).

While trade can happen in rupees, there is a difference in the demand for different currencies globally. Anyone who accumulates US dollars finds a large demand for the currency. It was on one side of 88 per cent of all trades in foreign exchange market in April 2019, according to data from the Switzerland-based Bank for International Settlements.

Some part of the demand for a currency can be because it is needed for trade.

India’s share of global exports has been under two per cent, according to the World Bank. The US accounts for 12.95 per cent of 2019 (pre-pandemic) exports.