Prime Minister Modi facilitates trade between India and Russia in rupees. This is considered an insult to the West. (Photo: dpa)

Photo: Peter Kneffel

India will soon start trading with Russia denominated in rupees. India’s largest bank, State Bank of India (SBI), will also support the new mechanism Association of Indian Export Organizations (FIEO) on Wednesday with. “The State Bank of India has agreed to facilitate trade with Russia in rupees and a number of other banks have also expressed interest,” the statement said. India Times A. Shaktivel, President of an organization set up by India’s Ministry of Commerce to promote exports.

The Reserve Bank of India (RBI) issued a lengthy circular letter in July urging the country’s banks to take additional precautions for export and import transactions denominated in Indian rupees, citing the interest of the international trading community in the domestic currency’s rise.

According to Sakthivel, the State Bank of India can do business with Russia in rupees, but Moscow has yet to name the bank. The name of the associated Russian bank may be announced in the next 15 days. “We have a good rupee payment mechanism in Iran, so the same thing will happen (with Russia).” SBI is a big bank that can meet the needs of exporters, he added.

The Exporters Association has demanded from the Indian government that trading in rupees be entitled to the benefits currently available for trading the major currency. Once the mechanism is in place, “we no longer want to worry about foreign currency fluctuations. The Indian rupee will speak for itself,” said Sakthivel.

The move was seen as a boost to trade with sanctioned Russia, as a similar mechanism was previously used to settle payments with Iran, which is also sanctioned. Indian companies are already swapping dollars and euros for Asian currencies to circumvent Western sanctions against Russia.

From April to July, the first four months of the fiscal year, India’s exports to Russia fell by about a third, while imports soared as refiners scrambled to buy cheaper Russian oil, according to government data. Hence the EU oil sanctions so far brought little loss to Russia.

Shaktivel said the government could expand export incentives under the rupee trade to boost exports to Russia and increase domestic currency receipts. The most likely stimulus will be the expansion of the current fully convertible currency trading program such as dollars and euros to rupees.

Russian President Vladimir Putin and Indian Prime Minister Narendra Modi met in Uzbekistan on Friday on the sidelines of a meeting Shanghai Cooperation Organization Summit, a regional security bloc that also includes China. There they will talk, among other things, about promoting trade between the two countries.

“Trading in rupees could increase India’s exports to Russia to around $5 billion in the current fiscal year,” said Shaktivel. That would be an increase of around $3.3 billion in the last fiscal year. Regardless, India’s total goods exports could increase by around 11 per cent to the equivalent of around 470 billion euros this financial year.

The State Bank of India (SBI) said it would open a special rupee account to conduct trade with Russia. However, it will not be the primary bank for this transaction. It took the necessary precautions and processed requests from various banks, including a Russian bank, following guidelines from the Reserve Bank of India, the India Times said in a statement accompanying the report.

India’s banking regulator had allowed the country’s banks in July to open special rupee accounts with banks in other countries to carry out overseas transactions in Indian currency. SBI clarified that India’s central bank has allowed all banks in the country to open special rupee vostro accounts. “SBI has not been identified as a Nodal bank,” he was quoted as saying Bloomberg of the statement.

Because even though Indian regulators have allowed banks to trade freely with Russia, many banks with an overseas presence are growing nervous about possible Western sanctions against their businesses. They are demanding guarantees from the Indian government that they will be protected from sanctions when doing business with countries like Russia.