Trade transactions in Indian currency under consideration
Under active consideration by Bangladesh Bank is a proposal on allowing the Indian currency for the settlement of bills for exports and imports to leapfrog dollar dearth, officials said.
It means the commercial banks will be allowed to maintain accounts with their corresponding lenders or branches abroad in the Indian rupee to help local businesses carry out foreign-trade transactions using the currency of the largest economy in South Asia.
Seeking anonymity, a BB official said the central bank had already started the process of enlisting the currency for overseas transactions.
“I think the final approval may come before the Prime Minister’s upcoming visit to India,” he said.
If the trade between the two countries takes place in rupee and taka instead of the greenback, the forex-market volatility would ease to some extent, the central bank official thinks.
Asked about the mechanism, the BB official said the bilateral- transaction mechanism will be finalised after discussion with the stakeholders.
Prime Minister Sheikh Hasina is likely to attend the 18th G20 Summit which will take place in New Delhi on September 9-10 following invitation from her Indian counterpart, Narendra Modi.
Another BB official, who also prefers to remain anonymous, says allowing the Indian rupee for the settlement of bills for exports and imports will little benefit Bangladesh as the bilateral trade is heavily tilted towards India.
The BB official predicts that if it is approved, Bangladesh needs to buy rupee in large volume to clear overseas bills as it does not have enough stock of the Indian currency. “If the Indian central bank, the Reserve Bank of India (RBI), allows taka in their foreign trade with Bangladesh, it will benefit both the countries,” he says about how to go for the cross-currency dealings.
The issue of using Indian currency to clear the international bills came into the spotlight again after BB governor Abdur Rouf Talukder’s last month’s visit to India where the RBI authorities pushed the proposal.
Currently, local businesses can settle their export and import using eight foreign currencies: the US dollar, Canadian dollar, Australian dollar, Singapore dollar, euro, Great Britain pound, Swiss franc, and the Chinese yuan.
Bangladesh, which boasted foreign-currency reserves of US$48 billion in August 2021, saw the stock go down to $31.286 billion as on March 15, 2023 as import bills outstripped exports and remittances because of disruptions to the global supply chain following the Russia-Ukraine war.
The Bangladeshi currency -taka- depreciated by around 20 per cent against the dollar to Tk 104.56 per dollar over the last eight months.
Bangladesh-India bilateral trade transactions came to US$ 15.93 billion in the fiscal year 2021-22. Industrial raw materials, capital machinery, cotton, yarn, fabrics, and chemicals worth $13.93 billion were imported in the year.
Bangladesh exported goods worth US$ 2.0 billion to the neighbouring country the same year.
Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz feels that it will start releasing pressure on the tightening foreign-currency reserves if it is implemented fully. “But this is not any easy task as the trade imbalance between the countries is too heavy,” he says.
About the stock of Indian currency, Mr. Masrur mentioned that Bangladesh exported some goods to the tune of US$ 2.0 billion to India. Instead of dollar, the country can take the Indian rupee so that these can be used to pay import bills to some extent.
Success of the initiative largely depends on another factor-whether the Indian exporters will feel encouraged getting their payment done in rupee instead of the strong global currency like US dollar, he notes.
But the government can use this option in G2G loan payments, he suggests.
Executive Director of the Centre for Policy Dialogue (CPD) Prof Mustafizur Rahman points out that the trade imbalance between the countries keeps growing. Bangladesh accounts for only US$ 2.0 billion of the total trade.
With the development, Bangladesh can take the Indian rupee equivalent to the US$ 2.0 billion of exports and use the money to settle import bills. “What will happen to the remaining part of the trade is not clear,” he told the FE.
He thinks the issue of exchange rate will be another critical factor on this extremely volatile forex market, whether it will be fixed through US dollar intermediation or currency-peg mechanism like India-Nepal arrangement.
“So, these are not clear to me. These need to be settled first,” the noted economist said.