Trade in local currencies With reference to India and Russia

Trade settlement in local currencies With reference to India and Russia

Why cross border transactions Countries may not be self sufficient Even if sufficient, may not be efficient Even if sufficient and efficient, locational advantage may not be there Land, labour, capital, inputs Even if all factors favourable, there may be Governmental requirements

Factors in cross border trade Minimum two parties Consideration Funding And channel for movement of funds Ownership And channel for movement of ownership Local / global / glocal rules Currency

Why currency is important? Local currency always preferred Not possible, why??? International currency Risks associated??? Why not adopt an international currency???

International currency Freely available Freely exchangeable Freely accepted for settlement of claim Limitation Cost Risk Effects on economy Unilateral action

Then why not settle trade in local currency? Advantages Comparative advantages vis-à-vis Cost Risk Effects on economy Unilateral action But there are limitations too: Availability Exchangeability Acceptability for settlement of claim

Then why not settle trade in local currency? Exchange rate May have to linked with a hard currency INR to Dollar to Rouble and vice versa Whether fixed exchange rate or floating exchange rate If rate of depreciation of one currency is more than that of the other currency Limits the acceptability for settlement of claim

Then why not settle trade in local currency? So what is equally important Size of economies Strength of currencies Synergies in trade Reciprocity and compatibility of the financial infrastructure

Trade between India and Russia Share of India’s exports to Russia to total exports of India has been relatively small at 0.6 percent India’s exports to Russia Include Engineering goods, Drugs and Pharmaceuticals, tea and Organic & Inorganic Chemicals Share of Indian imports from Russia to total imports of India has been around 1.05 percent during 2014-2015 to 2015-2016 The major items of India’s imports from Russia include Defence items, Pearls, Precious & Semi-Precious stones; Non-Ferrous Metals; Fertilizers; Iron and Steel and also petroleum, crude and products.

Trade between India and Russia ( US $ million) Year Export Import Trade Balance 2013-14 2120.4 3895.7 -1775.3 (-7.7) (-7.9)   2014-15 2097.3 4239.8 -2142.5 (-1.1) (8.8) 2015-16 1589.9 4580.3 -2990.4 (-24.2) (8) 2015-16 APR-JAN 1303 3825.4 -2522.4 (-26.8) (5) 2016-17 APR-JAN 1543 4215.4 -2672.4 (18.4) (10.2)

Arrangement between India and Russia Corpus maintained with RBI (account of Bank of Foreign Economic Affairs or BFEA, now known as Vnesheconombank) Credits in the form of loan from erstwhile USSR and import payment by Indian entities Debits in the form of loan repayment and payment to Indian exporters to Russia Current outstanding is INR 1,23,024 lakh crore

Arrangement between India and Russia Data out of Vnesheconombank’s account Items/ Calendar Year 2013 2014 2015 2016 (Jan 1 - Aug 12) Debit / Export ₹ 57223,45,891 ₹ 60544,34,259 ₹ 21261,79,946 ₹ 23188,70,487 Credit / Loan ₹47288,50,842 ₹ 59759,67,060 ₹ 46616,46,675 ₹ 51960,89,386 Balance ₹78781,36,195 ₹ 77996,68,996 ₹ 103351,35,725 ₹ 132123,54,624

Arrangement between India and Russia Data out of Vnesheconombank’s account

Arrangement between India and Russia Data out of Vnesheconombank’s account 2017 In lakh crore Opening balance ₹ 1,25,285 Debit ₹ 50,463 Credit ₹ 48,202 Balance 29.12.17 ₹ 1,23,024

Arrangement between India and Russia Whether the system could be more efficient? Are the funds remaining idle? Whether the beneficiary is willing to receive the payment in its currency instead of freely convertible / currency of the invoice/ contract Volatility in the currencies Availability and cost of hedging instruments Roles of Central Bank and commercial banks