Understanding Implications Of Trade In Rupee For Bangladesh-India Relations

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Following a widespread discussion and a period of anticipation, the decision to engage in Ruppe Taka trading has become prominent in recent times. Two parties have expressed their willingness to partake in this endeavour, with the aim of enhancing the business prospects of both countries.

Bangladesh and India have recently announced their intention to commence utilising the Indian Rupee as the designated currency for conducting bilateral trade transactions. Exporters will receive their export earnings in the form of the Indian currency, Rupees, subsequent to the implementation of the initiative commencing on July 11th. This development represents a significant advancement for Bangladesh, as the nation aims to reduce its reliance on the US dollar in light of declining foreign exchange reserves resulting from various global influences.

The onset of the Russia-Ukraine conflict has precipitated an inflationary crisis in the country, primarily driven by the escalating exchange rate of the dollar and the resultant increase in import costs. In line with prevailing economic circumstances, similar to other nations in the process of development, Bangladesh has experienced a decline in its foreign exchange reserves. Subsequently, in order to address the crisis and alleviate strain on the United States Dollar (USD), the discourse surrounding the utilisation of domestic currencies in trade has emerged.

Despite the initial indication by the Bangladesh Bank that trading in local currencies between the two nations could commence in September, a subsequent decision has been made to alter the currency for trading from Taka-Rupee to solely Rupee. In the ministerial meeting held in December of the previous year between the two nations, a suggestion was put forth to facilitate commercial transactions using the national currency, the Rupee. The issue was subsequently brought up during the March meeting of the National Economic Council of Bangladesh. Last year, the State Bank of India issued a directive urging its exporters to refrain from conducting transactions in dollars and other prominent currencies with Bangladesh. The report states that this measure was implemented in order to mitigate the depletion of Bangladesh’s reserves.

How will the Rupee-Taka trade work?

In accordance with the newly implemented scheme, a pair of banks from each respective country, namely Sonali Bank Ltd and Eastern Bank Limited (EBL) from Bangladesh, and State Bank of India (SBI) and ICICI Bank from India, have been granted the initial authorization to facilitate trade transactions using the Indian Rupee.

The banks initiated the establishment of nostro accounts, which refer to accounts opened by a financial institution in one country within another country, specifically for conducting foreign currency transactions.

Indian importers have the option to initiate Letter of Credit (LC) transactions with the aforementioned Indian banks, enabling them to procure goods from Bangladesh using the Indian currency, Rupees. In a similar vein, Bangladeshi importers have the option to initiate Letters of Credit (LCs) with the aforementioned Bangladeshi banks, thereby facilitating the importation of goods from India using the Indian Rupee as the currency of transaction.

The determination of exchange rates between the Rupee and Taka will be conducted by individual banks using a cross-currency approach. Settlements between countries will occur via the SWIFT mechanism, while within countries, the RTGS mechanism will be utilised to credit exporters’ accounts.

The importance of Rupee-Taka trade 

Mitigate the dollar crisis and alleviate the strain on reserves

The global repercussions of the depreciation of the dollar have become increasingly apparent as a result of the onset of the Ukraine conflict. Consequently, states are encountering a shortage of foreign currencies. The issue at hand gives rise to additional challenges such as the intricacies of supply chain management and the elevated costs of commodities, ultimately leading to widespread inflation on a global scale. Both Bangladesh and India have encountered challenges, which have resulted in a reduction of reserves in Bangladesh over the past year. Hence, Bangladesh exports products valued at $2 billion and imports goods worth $14 billion from India. The implementation of the new initiative in Bangladesh will facilitate the utilisation of earned Rupees from exports to cover the import bill. This measure is expected to alleviate strain on the nation’s foreign currency reserves.

The global financial community continues to face challenges in trade payment settlement as a result of increasing geopolitical complexities. This endeavour may contribute to the standardisation and reduction of intricacy. Furthermore, the impact of currency depreciation and reserve crises is currently exerting influence on the political landscape of numerous countries. In this scenario, the endeavour to engage in Rupee-Taka trade has introduced a layer of geopolitical intricacy to the respective regions.

Revolutionizing the Economic Horizon: Unveiling South Asia’s Trailblazing Transformation

When a country requires conducting transactions without the use of the US dollar, it is advisable to initiate such transactions with a trusted friend or ally. The continuous evolution of global politics serves as a valuable lesson in the significance of cooperation and diversity within the realms of economy and politics. The regional actors in South Asia have faced challenges in establishing a common economic platform due to various geo-strategic issues over an extended period of time. Hence, the bilateral relationship between Bangladesh and India, characterised by ongoing collaboration, serves as a noteworthy model for other regional stakeholders to adopt a more progressive economic approach. For instance, the potential success of the Rupee-Taka trade could potentially stimulate the adoption of a regional common currency in South Asia. This would indeed be a more favourable alternative for the region to enhance its trade volume.

One potential approach for other nations to adopt 

Furthermore, the bilateral trade involving the currencies of Ruppe and Taka serves as a noteworthy illustration for other nations grappling with currency scarcity and possessing similar economic ties. Due to the growing prevalence and increased frequency of regional trade on a global scale, there has been a notable surge in its magnitude and scope in recent years. During the current global economic crisis, it is crucial for nations to develop novel strategies aimed at mitigating the impact of foreign currency fluctuations.

To summarise, the adoption of rupees and taka as the trading currencies represents a significant advancement in the Bangladesh-India bilateral relationship. Furthermore, the proposed scheme seeks to augment velocity, efficacy, and convenience for enterprises on both ends of the community. The anticipated outcome of implementing this solution is a reduction in transaction costs and a decrease in the time needed for trade settlement. The augmentation of competitiveness in trade will concomitantly create new motivations for exporters in Bangladesh to actively facilitate the promotion of their exports to India. Furthermore, the initiative also presents numerous prospects for collaborative engagement within the South Asian region. Once again, the prevailing global economic conditions necessitate the adoption of novel and efficacious strategies to address the crisis.

– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).

Published in Eurasia Review [Link]