Era of trade in rupee begins

Bangladesh and India yesterday rolled out a landmark cross-border trade settlement mechanism involving the rupee and bypassing the US dollar.

As part of the arrangement, Indian exports and imports, which amount to about $16 billion, can be invoiced, paid for and settled in the rupee.

The State Bank of India's Bangladesh operations, Sonali Bank and Eastern Bank have opened special rupee accounts with two Indian banks: SBI's international services branch in Mumbai and ICICI Bank.

Bangladeshi exporters will receive their proceeds in rupee in those accounts and that balance would be used to pay for the imports from India. In short, import bills equivalent to the export proceeds can be settled under the mechanism. The exchange rate used would be market-determined.

The move comes as part of India's push to make the rupee a global currency and a part of the International Monetary Fund's Special Drawing Rights, an international reserve asset created by the Washintgton-based lender to supplement the official reserves of its member countries.

The value of the SDR is based on a basket of five currencies: dollar, euro, renminbi, yen and pound sterling.

As part of the efforts, the Reserve Bank of India has put in place a mechanism to settle international trade in rupees. The RBI has allowed banks from 18 countries to settle payments in the rupee, including Sri Lanka, Israel, Russia, Germany, Singapore and the UK. The Bangladesh Bank has now joined the fray.

"Today's event marks the beginning of a new chapter in our economic and commercial partnership," said Pranay Verma, the Indian high commissioner to Bangladesh, at the launch ceremony.

Successful use of the settlement mechanism will ease pressure on the country's foreign exchange reserves and reduce transaction costs with the neighbouring country, said Bangladesh Bank Governor Abdur Rouf Talukder.

The loss that takes place for trading in dollars thanks to multiple conversions would be minimised, facilitating greater trade competitiveness.

"It will benefit both countries and it can enable us to increase exports to India manifold," he added.

In fiscal 2022-23, Bangladesh's exports to India stood at $2.02 billion, up 2.5 percent year-on-year, while imports stood at $12.2 billion, down 24.2 percent.

"As Indian customers will see they are buying the products in their own currency, they may consider Bangladeshi products as their own. So, I think it will open a new way for us to boost exports to India," he added.

This, along with the Comprehensive Economic Partnership Agreement (CEPA), for which the two neighbours will start negotiations soon, is expected to make bilateral trade more robust, Verma said.

Md Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industry, hoped the new mechanism would ease trade between the two neighbouring countries.

To demonstrate how the system would work, two letters of credit from two Bangladeshi businesses were presented at the event. Bogura's Tamim Agro exported in rupee, while Nitol-Niloy Group made the first import in rupee

"We were urging to launch the settlement mechanism for long as it will ease the trade between the two countries," said Abdul Matlub Ahmad, managing director of Nitol-Niloy Group and also the president of the India- Bangladesh Chamber of Commerce and Industry.

Economists though remain sceptical about the success of the arrangement in easing the pressure on Bangladesh's strained foreign currency reserves.

"For now, there is no loss or gain for Bangladesh," said Ahsan H Mansur, executive director of the Policy Research Institute.

Only those businesses that export to India and also import from there will enjoy the gains from the new settlement mechanism, he added.

"It remains to be seen whether exporters are willing to do trade in rupee -- that is very important," said Selim Raihan, executive director of the South Asian Network on Economic Modelling.

Policymakers need to take steps to make businesses aware of the benefits of settling trade in rupees.

"We also need to pursue India to accept payment for a certain volume of imports in taka too," said Raihan, also a professor of the University of Dhaka's economics department.