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Rupee trade with Bangladesh likely as it fights forex crunch, say bankers
Indian banks have turned cautious and selective on their exposure to Bangladesh.
Synopsis
Two senior bankers told ET that in the wake of the turbulence faced by Bangladesh they expect a bilateral loan denominated in Indian rupees can be used by the country to pay for the imports from India.
By Sugata Ghosh, ET Bureau
Last Updated: Sep 26, 2022, 12:15 AM IST
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A dollar crunch in Bangladesh, dip in the country's foreign exchange reserves and a weakening taka may soon pave the way for a rupee loan line to Bangladesh and settlement of India's trade with the neighbour in local currency, according to banking circles.
Two senior bankers told ET that in the wake of the turbulence faced by Bangladesh they expect a bilateral loan denominated in Indian rupees can be used by the country to pay for the imports from India.
A framework for settling exports and imports invoiced in rupees is in place with the Reserve Bank of India's June 11 circular allowing special vostro accounts that banks of the partner country can have with banks in India.
It may further require a central bank notification allowing settlement of trade transactions in Indian rupees outside the Asian Clearing Union mechanism - an arrangement, in vogue since the mid-70s, to facilitate payments among member countries on a multilateral basis to economise on the use of forex reserves and transfer costs. (In May, RBI permitted settlement of trade with Sri Lanka in rupees as the country grappled with a severe shortage in hard currency).
Indian banks have turned cautious and selective on their exposure to Bangladesh amid fears that in the coming days banks there may find it difficult to organise dollars from the market to pay for the goods the country imports.
Bangladesh is considering currency diversification and measures to cut down dollar outgo.
"Under the circumstances we understand that a rupee loan facility may be under consideration. It would reduce the strain on Bangladesh's forex kitty and is likely to work out cheaper when the loan is repaid later. If the loan is in rupee, the outgo in taka terms would be less compared to a dollar loan because the rupee would also depreciate," said a banker.
However, the advantage is retained only if the loan is used only to buy Indian goods invoiced in rupees. If the rupees lent is converted to US dollars and used to buy dollar-invoiced goods, the benefit goes away.
But a rupee loan line is a matter that New Delhi and Dhaka, along with the central banks of the two countries have to finalise. "We have not received any communication from the RBI or the ministry so far. However, we believe some initial discussions have happened given the relationship between the two countries," said the person. An RBI spokesman did not comment on the matter.
According to the RBI circular, the exchange rate between the currencies of the two trading partner countries (settling trade in rupees) may be market-determined. "While a rupee-taka exchange rate can be arrived at using the dollar, the banks representing exporters and importers cannot readily sell rupees to buy taka or vice-versa as currencies are partly convertible. Unlike the trade with Russia, exports are more than imports from Bangladesh," said an industry official.
Bangladesh had a trade deficit of $14 billion with India in the last financial year. The country's forex reserves have fallen below $37 billion - down by over $11 billion in one year.
Geopolitics and financial compulsions have combined to push countries to figure out ways to promote foreign trade in domestic currencies. Whhile the India-Russia trade in rupee (yet to fully take off) is an outcome of US sanctions, a local currency trade with Sri Lanka is the fallout of an acute shortage in hard currency. "While rupee remains a currency of limited convertibility, the new arrangements could slowly increase its acceptance in other markets. Probably, countries would look beyond arrangements like ACU," said a banker.
india bangladesh trade: Rupee trade with Bangladesh likely as it fights forex crunch, say bankers - The Economic Times
Two senior bankers told ET that in the wake of the turbulence faced by Bangladesh they expect a bilateral loan denominated in Indian rupees can be used by the country to pay for the imports from India.
