In a major move, the Reserve Bank of India has issued a circular for international trade settlement in rupee.
System could help in Gimp emotes its support and facilitate trade with countries under sanction.
The RBI is deploying economics 101. Increasing the demand for rupee under this new system. Foreign Traders will require more rupees and more demand equals more Value.
11th of July 20, 22. The Reserve Bank of India, made a very, very bold announcement, whereby domestic Traders could settle their imports and exports with Indian rupees.
And this move of taking the iron, our Global is a very very big deal because it is said to help India do trade directly with Russia without depending on the American Banks. So, on one side while this could push us into New Horizons of World Trade, with Russia, Iran and Venezuela on the other. This move could actually destroy our relations both With the US and Europe.
So this is not just a major move from the economic standpoint but also from the geopolitical standpoint.
So the question is,
- What is our strategy behind bringing this system ?
- How will this help us trade with Russia and Iran ?
- In spite of the West in opposition ?
- How will this happen ?
- Help the economy of India and most importantly ?
- What are the study materials to help you understand this system better ?
The first thing we need to understand is why is RBI suddenly allowing International trades to be settled in INR ?
Well this is because when Russia invaded Ukraine, the American sanctions removed Russia from something called the Swift Network.
And this has brought several treat challenges for India and many other countries.
Now, to understand this RBI strategy,
We first have to understand how the existing Swift Network work and how have the US and Europe ?
Very cleverly, bully, the world trade with sanctions in the name of World, Peace.
So let’s understand how does the Swift Network work ?
The Swift Network usually involves six different entities, these are the Indian Trader. Indian Bank, American Bank (I), American Bank (II), foreign bank, and foreign trade or now the Highlight over here is that the Indian bank will have an account in the American Bank where it has its money in dollars.
Similarly, the Sri Lankan bank will have a bank account in American Bank to where again, they will store their money in u.s. dollars. This is cuz only u.s. banks can hold dollars. This is a reason why you will see that almost all the banks in the world have an account with a u.s. bank wherein,
They have their money stored in dollars.
So let’s say Reliance wants to import minerals worth 1 crore rupees from Sri Lanka.
So what Lance would do is they would give the Indian Bank 1 crore Indian rupees and ask them to pay the same amount in dollars to the Sri Lankan Traders account in the u.s.
So now that the Indian bank has one crore rupees in its Indian account, it would send a message.
To its dollar account in America to send one crore worth of dollars to Sri Lanka’s Banks dollar account in the u.s., in this case assuming 80 rupees to dollar to be the exchange rate. 125 thousand dollars would be transferred from the Indian account in the u.s. to the Sri Lankan account in the US.
And now that the Sri Lankan bank has 125 thousand dollars in the u.s. account, it would pay the Sri Lankan Trader, the equivalent of one twenty five thousand dollars from its account in Sri Lanka.
So assuming the exchange rate to be 350 between dollars and Sri Lankan droopy the Sri, Lankan bank would pay for crore 37. Lack 50,000 Sri Lankan, Rupees to the Sri, Lankan trader.
So here, as you can see, this system requires a lot of communication between different Banks. ATMs, a lot of calculation to be done due to fluctuations in exchange rates. And more importantly, it requires a complex network of thousands of Banks from all across the world.
Therefore, it is managed by a highly sophisticated messaging Network called the Swift Network. And this network is very very tightly controlled by both the US and Euro,
and the catch over here is that more than 50% of the international trades are done through the Swift messaging system alone.
So the question is what is a problem with the system ?
And why is the RBI trying to build an alternative ?
Well, there are three major problems with this system.
Firstly – since this entire system is controlled by Europe and the us, if they do not like you they will just impose sanctions and cut you off from the Swift Network. So in short, they will not let you trade through the Swift system. And this is what the West did to Iran.
Secondly – not letting you trade could still be acceptable, but since us has control over all the countries’ dollar accounts, they could even freeze your money that is kept in their US bank accounts, and this is what happened to Russia.
Where in after the Ukraine Invasion, 300 billion dollars of Russian foreign reserves have been frozen.
So in spite of having three hundred billion dollars, Russia cannot use its own money to trade.
Presidents of the United States – Joe Biden (46th U.S. President) He said – “Will limit Russia’s ability to do business in dollars, Euros pounds, and yen”
To pressure. Russia and on “Vladimir Putin” is growing new sanctions on its Central Bank. Just today,
The sanctions against the “Central Bank of Russia” which were enacted on Monday morning are probably the single largest sanctions action in modern history.
and lastly this system is very very costly, since all four entities involved in the system, take a commission, the cost of transferring money itself cost you anywhere between 1-5%
So on a transfer of save 120Cr if the banks had a 3% exchange rate margin. That means they would charge you 3.6Cr rupees just of the exchange rate.
So all of this put together, even if India wants to trade with Russia, even though we do not have anything to do with the Russia Ukraine Invasion just because the West does not like it. We are not able to trade with Russia.
with ease and what’s even worse is that it’s not like the Europeans of stop trading with Russia.
because they realised that if they do not get Russian gas they are economy will fail.
So you know what they have made exceptions.
That some Russian accounts will be allowed to operate so that Europe can still use Russian gas and at the same time be the moral police of the world,
Indian Foreign Minister – S.Jaishankar. He Said – “you know somewhere Europe has to grow out of the mindset. That Europe’s problems are the world’s problems, but the world’s problems are not Europe’s problems.
Tell me buying Russian gas is not funding the mo. I mean, why is it ?
It’s only Indian money and oil coming to India which funds but it’s not gas coming to Europe which one’s if If countries in Europe and the west, and the United States are so concerned, Why don’t they allow Iranian oil to come into the market ? Why don’t you allow it ?
When is your no oil to commit to the mark”.
This is how the West is using. Its so-called Supremacy to hinder other countries’ trade in the name of moral policing and bold piece. And this is where ladies and gentlemen. Rbi’s move comes in. Here’s where the India has come up with an alternative system to bypass the system and still do business with foreign countries and they did that by allowing International Trade to be done in. Indian currency.
Now, if you look at the RBI notification, they say that this can be done through something called Vostro account.
So the question over here is, what is Vostro account ?
How will this transaction actually happened and if executed ?
How will this benefit India ?
Well, to understand the system, let’s say a Russian company wants to trade with an Indian named Akshay Kumar and he wants to do that without going to Swift.
So now, the Russian company will have a Russian bank account, which has money student rubles and this Russian bank will also have an account in India.
Where they would store the money in Indian rupees in an Indian bank and this account is what is called as Vostro account.
So, basically, it’s a Banks bank account held by a foreign Bank. In this case, it’s a Russian Banks bank account held in the Indian bank.
So now if Akshay Kumar wants to import sunflower oil from a Russian company, here’s how it will work out.
Firstly, Akshay Kumar pays 5Cr Indian rupees to the Russian bank account in the Indian bank which means the Vostro account will get 5Cr Indian rupees, Then since the Russian bank has 5Cr Indian rupees in its Indian account, assuming exchange rate to be 1.5 this Russian bank will use its account in Russia, to pay the sunflower oil Trader.
A converted some of 3.33Cr Ruble. That is how the Russian Trader gets 3.33Cr Ruble in his account.
Now mind you this would also involve commissions from both the Indian bank and the Russian bank. So in reality he would get 3.33Cr rubel – commission charges in his account.
Similarly this was wrong. Count will also be used for exports.
So let’s say a Russian company wants to import tea from India. So the Russian company would pay a hundred thousand Russian rubles, the Russian bank,
Then since the Russian bank has Indian rupees toward in the Vostro account in India, that was through account would pay 1lakh 50,000. Indian rupees to the Tea Company.
This is again, assuming an exchange rate of 1.5 for simplification of calculation. So, just like last time, the commission’s will be deducted on both sides and the remaining amount will be transferred. This is how the Expected to change format. Once this system is brought into play now. The question here is, if this system is brought into play,
what are the advantages that India will enjoy ?
Well, here’s where we’ve got two game-changing advantages and one big threat that is involved in opting for this system.
The First Advantage is that, we’ll be able to trade with Russia, which is one of our biggest trade partners with a bilateral trade of Thirteen billion dollars and considering the condition of Russian trade. Right now, we could get our Goods at a much cheaper cost.
Secondly, it’s not just Russia, but we could also start trading with other countries that have been sanctioned by the United States. And this includes critical players like Venezuela and Iran. And fun Factor here is that both these countries had already shown interest in using this kind of system. so that’s pretty good. Cherry on the cake over here is that this list also includes the one and only United Arab Emirates. So this system will help us a lot in terms of decreasing our dependence on dollars it will help us a lot in protecting a trade from the whims and fancies West. And most importantly, it will ease the pressure on our exchange rates as of now.
And lastly, the biggest threat to us is that we are literally challenging the dominance dollars. So obviously the United States will definitely not be happy about it.
So don’t be surprised if this move is taken back or if the United States threatens to impose sanctions on India, because mind, you are bilateral trade with U.S. stands at hundred and nineteen point four two billion dollars.
So here’s where we might face some trouble.
This is all that you need to know about the RBI notification, its functioning and its geopolitical implications.
And last part, which are the study materials to help you understand this fight of currencies better.
The first reading material that I’m attaching is this wonderful article written by Deepak Shenoy. Click to view And here’s where he explains this entire system with this sweet little diagram.
So read through this document and you’ll get a very good idea about was throw accounts and the Russia, India transactions.
The second thing attached is a document on the Deep technicalities of the Swift Network. Click to view So now that you understand the oversimplified version, you could go deeper and understand the tech behind this system.
And thirdly, I am attaching a few articles on DW the US sanctions and the information related to Swift that’s coming straight from their website itself.
So read through that and do let me know what you think about in the comment section.
