India-Bangladesh Rupee Trade: A long-term play to reduce dollar dependence.
India and Bangladesh launched a rupee-based trade settlement mechanism in June 2023 with the ambitious goal of reducing their dependence on the US dollar for bilateral trade. However, the initiative has seen a slow start, with a mere $0.46 million transacted in nearly seven months. This article explores the challenges and potential of this initiative, particularly for the crucial textile and apparel sector in both countries.
Current hurdles, a tangled web
The dominance of the US dollar in global trade settlements presents a significant obstacle. Businesses are accustomed to the familiar territory of dollar-denominated transactions, and the complexities and uncertainties associated with a new system can be off-putting. Establishing a smooth process for issuing and managing Letter of Credit (LCs) for rupee-based transactions is proving to be another hurdle. Delays and complexities in the LC process are discouraging businesses from participating. Exchange rate volatility between the rupee and taka adds another layer of risk, deterring both exporters and importers from adopting the new system. These factors, coupled with initial hiccups with LCs, have contributed to the slow uptake of rupee-based trade.
Despite the current challenges, stakeholders remain optimistic about the initiative's potential, particularly for the textile and apparel sector, a key industry in both countries. However, the potential benefits for each country differ.
Bangladesh's dollar dilemma
Bangladesh struggles with a scarcity of US dollars, making exploring alternatives like the rupee attractive from an import cost perspective. Rupee-based trade could potentially lead to increased imports of raw materials like fibers, yarns, fabrics, and chemicals from India. This would be a welcome development for Bangladeshi manufacturers.
India's focus, raw material exports
For India, the rupee trade initiative holds greater significance for boosting exports of raw materials like fibers, yarns, fabrics, and chemicals to Bangladesh, rather than finished textile imports. By settling payments in rupees, India can reduce its reliance on the US dollar, which is crucial for managing its foreign exchange reserves.
The bigger picture
Facilitating trade in local currencies can strengthen economic ties between India and Bangladesh, fostering a more integrated regional market. This economic integration can lead to a number of benefits, including:
Reduced transaction costs: Eliminating the need for currency conversion can lead to cost savings for businesses, making them more competitive.
Faster trade settlement: Rupee-based transactions can potentially streamline the settlement process compared to dollar-based transactions, leading to quicker access to funds for businesses.
Despite the challenges, stakeholders remain optimistic about the initiative's potential. To achieve success, addressing operational hurdles such as simplifying LC procedures and mitigating exchange rate volatility will be critical for broader adoption. Additionally, exploring the possibility of using Bangladeshi Taka in bilateral trade, alongside the rupee, could help address the trade imbalance between the two nations.
This initiative, while facing initial hurdles, holds promise for fostering regional economic integration and potentially benefiting the textile and apparel sector in the long run. However, overcoming existing challenges and exploring further development opportunities will be critical for its success.