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Trade in Local Currency: Illustration of India’s Rupee Trade with Nepal, Iran and Russia

Published in 2019

Abstract: Random movements in national exchange rates particularly against major global invoicing currencies such as US dollar, euro, pound sterling, etc. cause uncertainty in export proceeds and import payments. Along with other hedging instruments, trade in local currency instead of global invoicing currencies could mitigate the adverse impacts of exchange rate volatility in the developing countries. Countries have explored the use of national currencies through various arrangements including currency swap arrangements and bilateral trade arrangements. India’s rupee trade with Russia, East European countries, Nepal, Iran and other countries in the past is one such example. This scheme, which was actually conceived as a trade policy instrument in the 1950s through 1980s during the times when India faced severe foreign exchange constraint, is now being considered as a generalized policy option for mitigating exchange rate-related risks in trade. Against this backdrop, this paper examines the features of rupee trade arrangements with Nepal, Russia and Iran and its possible extension for a number of identified oil-exporting countries.