In a world of dynamic economies and interconnected trade networks, Bangladesh’s recent decision to conduct trade using the Indian rupee marks a significant step toward reshaping global trade. This action makes us wonder about the seemingly endless opportunities when nations are willing to take risks. The US dollar has long been the backbone of international trade, but its influence also leaves countries vulnerable to market whims and geopolitical unpredictability.
The choice by Bangladesh to conduct business with India in rupees is an important step toward strengthening economic ties between the two close neighbours. Given their long-standing trading partnership, this decision enhances their mutual understanding and creates potential avenues for beneficial cooperation.
Bangladesh and India are breaking themselves free from the historical dependence on external currencies like the US dollar by using the rupee as the medium of exchange for trade. This change creates a direct, cost-effective channel for doing business, which could result in lower transaction costs, increased efficiency, and increased transparency in cross-border trade. The conditions for long-term economic growth are created by such an environment that encourages investment.
Concerns about currency valuation are one of the factors driving this strategic decision. The devaluation of Bangladesh’s national currency, the Taka (BDT), in relation to the US dollar has reduced foreign exchange reserves and fueled inflation. Global efforts to diversify foreign exchange reserves are driven by a similar trend reflected in other important currencies. Data from the Currency Composition of Official Foreign Exchange Reserves (COFER) of the International Monetary Fund show that the US dollar’s proportion of total foreign currency reserves decreased from 73% in 2001 to 54.09% in Q4 2022.
In order to implement this trade initiative, certain banks from both nations are involved, including Sonali Bank Ltd. and Eastern Bank Limited (EBL) in Bangladesh and State Bank of India (SBI), and ICICI Bank in India. These banks have been permitted to settle international trade in Indian rupees using nostro accounts, which are foreign exchange accounts set up by banks in other nations. To facilitate the import of goods from Bangladesh, Indian importers can start Letters of Credit (LCs) with Indian banks. Likewise, Bangladeshi importers can start LCs with designated Bangladeshi banks for importing Indian goods. Individual banks will decide the exchange rate between the rupee and the taka on a cross-currency basis. Settlements will occur via the SWIFT mechanism for international transfers and the Real Time Gross Settlement (RTGS) mechanism domestically for crediting exporters’ accounts.
At the forefront of these benefits lies the prospect of revitalising Bangladesh’s trade balance with India. This transition is poised to introduce several effects. The overall foreign exchange reserve won’t be directly impacted, but it does signal a move away from using the dollar as the primary exchange unit. Businesses will not be required to acquire dollars, enabling direct transactions that might improve trade efficiency and increase exports. The rupee may become more popular, and India’s net demand for reserves may increase. This change may eventually result in even less reliance on the dollar. This strategic change presents a chance to close the trade gap between the two countries, where total trade is $18 billion, of which $2 billion is exported from and $16 billion is imported into Bangladesh. Bangladesh stands to streamline transactions by adopting rupee-based trade, which could result in a spike in exports. The trade imbalance might be effectively addressed by this strategic alignment, which would also help Bangladesh’s economy grow. Furthermore, Bangladesh stands to gain significantly from India’s potential provision of a credit line denominated in rupees. In particular, this credit facility may help reduce the strain on Bangladesh’s foreign exchange reserves when paying for essential imports. This foresightful action may be crucial in bolstering Bangladesh’s ability to manage economic uncertainties successfully and stabilise the country’s financial foundation.
However, multiple variables may come into play for these advantages to materialise. One significant factor that might greatly impact the outcome is how willingly the private sector in Bangladesh is ready to accept the rupee. Industries that depend heavily on international markets for raw materials may still need to buy in US dollars. As a result, Bangladesh’s central bank must deftly negotiate this challenging terrain, striking an amicable balance that meets the needs of various sectors while preserving overall economic stability. For Bangladesh, challenges persist despite positive outcomes. Bangladesh must consider increasing exports to India if it wants to make the most of this mechanism. Bangladesh is in a good position to navigate these difficulties and steer toward a more balanced and resilient economic future on the constantly changing international stage thanks to its proactive approach and potential benefits like simplified transactions and decreased reliance on third-party currencies. The extent to which businesses use this information and how well we make it available to them will determine the success of this.
Author- Rafi Karim
