🤯 Dollar Out, Rupee In?
The RBI has been trying every method in the book to boost the rupee. And it may have finally found a method which could work.
What do the stock markets, commodities and the rupee have in common?
They are all crashing.
The only thing rising right now? The dollar.
In fact, it is on such a roll that for the first time in 20 years it is equal to the Euro.
And as the dollar keeps rising, the rupee will keep depreciating making imports costlier and costlier for us.
The RBI has been trying tooth and nail to boost the rupee but it keeps on sinking to its lowest.
Looks like it may have finally found a strategy that could boost the rupee and solve our current account deficit issue.
💡 The RBI's Latest Strategy
The whole world mainly trades in dollars. That's because most currencies and most importantly oil prices are linked to the dollar.
So, it is easier to trade in it. And since everyone accepts it, it is also safe.
But this also means that all countries have to maintain enough dollar reserves to import the things they want.
And for countries that import more than they export, like India, this proposition could pose a problem.
What's more, if you manage to anger the US, like Russia has, you could be cut off from the world because the country could seize your dollar reserves (often a majority of a country's dollar reserves are stored in foreign banks) or stop you from using dollars.
But still we keep giving a hell lot of importance to the dollar because that's the way the world works.
However, because of the dollar's insane rally (here's why that is happening), countries can't afford to keep using it anymore because it is making imports too expensive.1
So, now RBI has finally decided to ditch the dollar.
Yes, you heard it right. RBI has allowed Indian importers and exporters to settle some trades in INR (Banks will need to take special permission to set up accounts to facilitate this).
Wait, can we do this?
Yes! So, why didn't we do this before?
It would be a lot of headache. Plus, for India to open up its economy and trade with other countries we had to start trading in currencies that were more widely accepted.
But now this headache is worth it because:
It will help us preserve our dwindling foreign exchange reserves (which have fallen to a 14-month low).
And reduce our current account deficit.
Wait, but whether we pay in rupee or dollar or for that matter any other currency, it will cost the same only, no?
Then how will this help? It will, because it will then lessen our current account deficit.
You see, if we continue making transactions in rupee, then the demand for the dollar will go down and there will be more dollars in the market. So, its price will also go down.
Therefore, we won't have to pay as much for stuff as we have to do now.
Also, earlier there wouldn't be many takers for the Indian rupee. After all, India doesn't export much. So, keeping the Indian rupee in its forex reserves wouldn't make sense for a country because what would it even use the rupee for?
But now the RBI claims the global demand for rupee is rising.
Wondering who is demanding it?
🤝 The India-Russia Love Story
One major contender is Russia.
Russia is a major exporter of oil but most countries are now boycotting its supplies (due to the Russia-Ukraine war).
Meanwhile, India is struggling to pay for oil.
So, the two countries decided to help each other out.
India started buying Russian oil (so much so that Russia has now become our No. 1 oil supplier) and Russia gave it to us at a discount.
Okay, ReadOn but where does the rupee trade settlement fit into all this?
You see, all the Western nations are katti (on bad terms) with Russia and are not allowing it to use the global financial system.
So, Russia has no use for the dollar.
Trading in ruble or even another currency like yuan or rupee would be better for it.
Plus, trading in currencies other than the dollar also has an added advantage for Russia.
It will reduce the dollar's dominance and could dethrone it as the world's go-to trading currency.
All in all, a win-win situation for both us and Russia.
But what will Russia do with its rupee reserves?
It will give them back to us. Huh?
You see, Russia imports a lot of stuff from us like tea, coffee, pharmaceuticals and tobacco.
So, the money we pay it for oil it can use to pay us back for all the other stuff.
Ek haath de, ek haath le.
Seems like a truly genius idea by the RBI, right?
It is, but it could also have some drawbacks. You see, while this makes our arrangement with Russia chill, most other countries are not going to accept the rupee.
And because we aren't getting dollars for our exports from Russia, our dollar reserves will go down further, making things difficult when we buy from other countries.
However, if the move manages to boost the rupee, this problem would also be easily solved.
Nonetheless, the RBI isn't pinning all its hopes on this move because there are lots of ifs and buts involved.
It has introduced several measures to boost the rupee. If you want to read an in-depth piece about these measures, let us know in the comments.
Until then, let's wait and watch and hope that the rupee goes up again, or we could be in a situation similar to Sri Lanka or Pakistan.
Let's look at India's case alone. When a dollar was worth Rs. 70, we would have to pay 70× $105 (the price of crude oil today) for one barrel of oil.
Now that the dollar is worth Rs. 79.60, we will have to pay Rs. 79.60× $105 per barrel. This is what is increasing the cost of our imports and leading to the current account deficit.
⚡ In a line: The RBI is allowing traders to settle some trades in INR to kill two birds with one stone: bring down the dollar and reduce current account deficit.
💡Quick question: How impactful do you think this move will be?
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🤯 Dollar Out, Rupee In?
Please do write an article about all measures which RBI has under its sleeves to curb appreciating dollar against rupee, waiting for it. Additionally its a well written article!