India said to plan sops for rupee use in Russia trade
- August 25, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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India said to plan sops for rupee use in Russia trade
Subject: Economy
Section: External sector
Details:
- India may give incentives to exporters settling trades using rupees to boost the acceptability of the currency and increase sales of goods to Russia, which has fallen because of western sanctions, according to government and industry sources.
- The move is designed to boost Russian trade after the Reserve Bank of India (RBI) put in place a mechanism for international trade settlements using the rupee last month. Indian companies are already swapping out the dollar and euro for Asian currencies to settle trades to avoid Western sanctions imposed on Russia after their invasion of Ukraine.
- The most likely incentive that will be granted would apply a current programme for trades using fully convertible currencies such as the dollar and the euro to the rupee, which is only partially convertible, according to the three sources. Under the existing programme, Indian exporters receive rebates on a portion of the taxes and customs duties accumulated during the entire process of manufacturing a good. The new incentive would apply those rebates to goods exported using the rupee as a currency, the sources said
- Convertibility of currency means when currency of a country can be freely converted into foreign exchange at market determined rate of exchange that is, exchange rate as determined by demand for and supply of a currency. For example, convertibility of rupee means that those who have foreign exchange (e.g. US dollars, Pound Sterlings etc.) can get them converted into rupees and vice-versa at the market determined rate of exchange. Rupee is both convertible on capital account and current account.
Rupee convertibility and its advantages:
| Current Account Convertibility of rupee | Capital Account Convertibility of Rupee |
| Current account convertibility means when foreign exchange (e.g. Pound Sterling, U.S. Dollar etc) received for export of merchandise and services can be freely converted into Indian rupees and vice-versa in case of imports. | Capital Account Convertibility (CAC) is the freedom to convert local financial assets into foreign financial assets at market determined exchange rates. Referred to as ‘Capital Asset Liberation’ in foreign countries, it implies free exchange ability of currency at lower rates and an unrestricted mobility of capital. India, at present has partial capital account convertibility |
| Encouragement to exports: Market rate remains generally higher than the officially determined exchange rate. This implies that from given exports, exporter can get more rupee against foreign exchange. This will help to increase exports | Unrestricted mobility of Capital: Capital account convertibility allows free mobility of Capital into a country from the foreign investors. It allows converting the foreign exchange brought into as Capital to convert into rupees at market determined rates, which makes the investors encouraging. It allows the foreign investors to easily move in and move out from an economy. This enables the domestic companies to raise funds from abroad. |
| Encourages import substitution: Imports become expensive due to convertibility of rupee. So it discourages imports and boosts import substitution | Ability to invest in abroad easily: Capital account convertibility allows the individuals of a nation to invest in abroad by easily converting their rupees into foreign exchange at the rates determined by the Market. This enables those potential domestic investors to acquire & own the assets in abroad. |
| Incentive to remittances from abroad: Earlier, NRIs used to send money illegally to India such as Hawala money and gold etc. But due to removal of restrictions, NRIs can easily remit money to India. It will help to improve Balance of paymen | Improved access to global financial markets: One can easily invest in the equity and debt markets of another economies alongside a reduction in the cost of capital |
| Reduction in Malpractices: The malpractices like under-invoicing of exports may not arise as rupee is fully convertible and they will get full value for their exports | |
| A self – balancing mechanism: Another important merit of currency convertibility lies in its self-balancing mechanism. When balance of payments is in deficit due to over-valued exchange rate, under currency convertibility, the currency of the country depreciates which gives boost to exports by lowering their prices on the one hand and discourages imports by raising their prices on the other. |
Tarapore Committee on capital account convertibility: A committee on capital account convertibility was setup by the Reserve Bank of India (RBI) under the chairmanship of former RBI deputy governor S.S. Tarapore to “lay the road map” to capital account convertibility. In 1997, The Tarapore Committee had indicated the preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal consolidation a mandated inflation target and strengthening of the financial system.