Sambhav-2025

Approach Introduce by defining bilateral trade agreements and currency swap arrangements and their role in international trade. Explain how they facilitate the internationalisation of the rupee with relevant examples. Analyze their impact on reducing currency risk and improving India's economic stability. Conclude suitably.

Introduction

Bilateral trade agreements (BTAs) and currency swap arrangements are key instruments in international trade, enabling countries to trade directly using their local currencies instead of the US dollar. These mechanisms play a crucial role in promoting the Indian Rupee (INR) as an international trade currency, reducing dependence on foreign exchange reserves, and mitigating exchange rate volatility.

Body

• Role of Bilateral Trade Agreements and Currency Swap Arrangements in Promoting the Rupee as a Trade Currency:
  • Facilitate Direct Trade in Rupees: BTAs enable partner countries to trade in INR instead of USD, increasing global demand for the rupee.
    • Example: The India-Russia Rupee-Ruble Mechanism enables crude oil and fertilizer imports without USD, reducing exchange rate risks.
  • Strengthen Trade Partnerships: Agreements with Russia, UAE, and Sri Lanka promote rupee-based settlements, enhancing INR’s international acceptance.
  • Reduce Forex Volatility: Local currency settlements minimize exchange rate fluctuations, ensuring stable trade costs and financial predictability.
  • Provide Liquidity Support: Currency swap agreements allow India and partners to exchange local currencies, reducing dependence on dollar reserves.
  • Enhance Financial Stability: Swaps stabilize forex reserves, preventing financial crises due to forex shortages.
  • Promote Regional Economic Integration: Trade in local currencies strengthens economic ties with strategic partners.
    • Example: The $75 billion swap agreement with Japan offers liquidity support, reinforcing rupee stability.
• BTAs and Swap Agreements Role in Reducing Currency Risk:
  • Lower Exchange Rate Volatility: When trade occurs in INR, businesses and governments are insulated from sharp currency fluctuations.
  • Reduce Dependency on the US Dollar: The dominance of the dollar exposes economies to external shocks from US monetary policy changes; INR-based trade reduces this risk.
  • Improve Trade Balance Stability: When imports and exports are settled in INR, India’s forex reserves remain unaffected, ensuring a balanced BoP (Balance of Payments).
  • Example: India’s Bilateral Swap Agreement (BSA) with Sri Lanka provided crucial forex support during Sri Lanka’s economic crisis, stabilizing trade between the two nations.
• Challenges in Expanding Rupee-Based Trade:
  • Limited Global Acceptance of INR: Most global trade is still USD-dominated, making INR-based trade agreements difficult to scale.
  • Liquidity and Convertibility Issues: The rupee is not fully convertible on the capital account, restricting its use in international financial transactions.
  • Resistance from Trading Partners: Some countries prefer USD settlements due to wider acceptability and lower risk.
  • Example: The India-UAE rupee settlement mechanism is still not fully operational, as UAE businesses prefer dollar-denominated transactions.

Conclusion

Bilateral trade agreements and currency swap arrangements are crucial tools for promoting the rupee as an international trade currency, reducing India's dependence on the USD, and strengthening economic resilience. By expanding such mechanisms, India can mitigate currency risks, stabilize trade costs, and enhance financial sovereignty, paving the way for a more self-reliant global trade framework.