India and Bangladesh, two notable economies in South Asia, have decided to settle bilateral trade using the rupee rather than the US dollar. In July 2023, they reached an agreement to continue trade deals in the Indian rupee and the Bangladeshi taka. This new trend of using rupees other than global currencies has sparked debates about emerging trends and causes of de-dollarization in South Asia.
Bangladesh has recently established a bilateral trade agreement with India, making it the 19th nation to conduct trade transactions in Indian rupees. The two nations engaged in negotiations with the aim of discontinuing the US dollar and instead utilizing domestic currencies for settling transactions. Before Bangladesh, a total of 18 nations, including Russia, Germany, the United Kingdom, Singapore, Sri Lanka, Malaysia, Oman, and New Zealand, had already initiated the practice of engaging in international trade with India using the Indian rupee. On March 29, India implemented an international trade policy that allowed it to utilize the Indian rupee with countries facing a scarcity of US dollars or currency-related challenges.
In order to facilitate cross-border trade with India, two banks in Bangladesh, Sonali Bank and Eastern Bank Limited (EBL), would establish nostro accounts with two Indian lenders, State Bank of India (SBI) and ICICI Bank. Nostro accounts are utilized for the purpose of engaging in international trade and facilitating various foreign exchange transactions. The utilization of the Indian Rupee for trade between India and Bangladesh offers economically efficient cross-border transactions. It thereby fosters the enhancement of economic relations between the two countries. The value of exports from Bangladesh to India amounted to approximately $2 billion in FY 2021-22. Also, Bangladesh’s imports from India amounted to approximately $13.69 billion. As the bilateral trade between these two nations is significantly high, this new agreement will create new economic opportunities for both nations. Also, as per the agreement, larger portions of trade will be conducted in rupees, while the remaining exports will be settled in US dollars.
Bangladesh is a significant country in South Asia and in global trade. It is currently grappling with a scarcity of the US dollar due to a decline in its foreign exchange reserves. This decline has been attributed to increased import expenditures, coupled with moderate levels of remittances and export earnings. The dollar reserves of the country have experienced a reduction of over 34% since the Russia-Ukraine war started in February 2022, resulting in $31.60 billion. In May, the Bangladeshi taka experienced a depreciation of more than 16% against the US dollar. So, the central bank was compelled to liquidate over $20 billion of its net foreign exchange reserves. With growing concerns, it was essential for Bangladesh to diversify payment methods to ensure dollar reserves. This particular reason has driven Bangladesh’s de-dollarization trend. Bangladesh further anticipates that conducting trade in rupees will result in reserve savings of approximately $2 billion.
India has stepped up its de-dollarization efforts in international trade. India’s pursuit of enhancing its domestic manufacturing sector necessitates the import of energy products and raw materials for production purposes. Consequently, this has resulted in a trade deficit over time. In the FY 22-23, the trade deficit of India amounted to approximately $122 billion, representing a 51% increase compared to the $178 billion recorded in 2021. Simultaneously, the implementation of a more restrictive monetary policy by the United States Federal Reserve has exerted a significant strain on India’s availability of US dollar funds. In order to alleviate the strain on India’s dollar reserves and facilitate trade with other nations, it was imperative for India to pursue diversification and increase the utilization of local currencies for settlement. In the year 2022, India initiated its independent rupee trade settlement mechanism, which enabled countries lacking sufficient dollar reserves or facing restrictions in dollar-based trade to engage in trade transactions utilizing the Indian rupee.
Similarly, India’s trade facilitation policy in Sri Lanka is gaining significant momentum. India and Sri Lanka are currently engaged in a comprehensive evaluation of the feasibility of adopting the Indian Rupee as the currency for conducting economic transactions. Extensive discussions have taken place regarding this initiative through the implementation of trade and investment-oriented strategies. Before these discussions, India has extended Sri Lanka with a credit line amounting to $1 billion in order to support its economic stability amidst the current volatile circumstances.
The global utilization of local currencies in international trade has witnessed a notable upsurge in the aftermath of the economic consequences resulting from the Russia-Ukraine conflict. This action by South Asian countries is intended to decrease reliance on the US dollar and enhance the stability of regional trade. Firstly, the primary objective of this initiative between India and Bangladesh is to facilitate international trade settlements in INR based on exchange rates determined by the market. This would effectively eliminate the necessity of relying on the United States dollar (USD). Secondly, the economic ties between India, Bangladesh, China, and Russia serve as an additional catalyst for de-dollarization. The Russian ruble and Chinese yuan have been increasingly recognized as international currencies, serving as alternatives to mitigate the impact of Western sanctions and challenging the dominance of the US dollar. Thirdly, the implementation of new monetary policies in the United States has prompted investors to withdraw their capital from Asian economies, thereby instigating a devaluation of currencies across the majority of these developing economies.
From a geo-economic standpoint, India would gain numerous advantages associated with the internationalization of the INR. It would alleviate exchange rate uncertainties for Indian enterprises by obviating the necessity of using USD in advance of conducting financial transactions. Moreover, it facilitates additional avenues for Indian enterprises to access international capital and financial resources. Also, it enhances the effective operation of the Indian economy by facilitating the inflow and outflow of foreign trade and capital. In addition, this policy fosters enhanced confidence in the Indian economy, thereby facilitating domestic entities’ ability to attract investments from both individual and institutional sources.
The United States currency has historically served as a global reserve currency since World War II. But it seems to be experiencing a decline in its dominant position. Indeed, the recent actions taken by India and Bangladesh only make up a small portion of the larger global de-dollarization phenomenon. Further, developing economies worldwide have been experiencing a diminishing faith in the stability and reliability of the United States dollar. The depreciation of domestic currencies has led to an escalation in inflationary pressures in South Asia. It has elevated the cost of imported food and energy, exacerbating the current account deficit. At present, there is a global trend among other nations to enhance the variety of currencies used for international trade settlements.
In concluding remarks, it can be added that the de-dollarization in South Asia is indicating significant challenges to the dominance of the US dollar. However, it is important to acknowledge that de-dollarization is a complex process that cannot be swiftly accomplished. It is highly likely that the dollar will continue to maintain its position as a global currency in the foreseeable future. But additional concern regarding the de-dollarization process pertains to the potential risks it may pose to financial markets, particularly in emerging economies. This trend can also pose a challenge due to the inherent volatility in the currencies of developing nations. This necessitates the implementation of more inclusive financial arrangements and enhanced coordination among developing economies following this trend.
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Aishwarya Sanjukta Roy Proma is a Research Associate at the BRAC Institute of Governance and Development (BIGD). She is a research analyst in security studies. The views and opinions expressed in this article are those of the author.
Aishwarya Sanjukta Roy Proma is a Research Associate at BRAC Institute of Governance and Development (BIGD).
