No currency swap, partial trade with India now in rupee only

Bangladesh and India will settle a portion of bilateral trade transactions in rupee, not through the taka-rupee swap that has been under extensive discussions over the past few months.

The Bangladesh Bank has permitted Sonali Bank and Eastern Bank Limited (EBL) to open nostro accounts in rupee with the State Bank of India and ICICI Bank.

Only the income earned in rupee from exports can be deposited into these accounts. And the money deposited in these accounts can only be used to meet the cost of goods and services imported from India.

Infographic: TBS

Besides, in the case of imports, advance payments can be made from these accounts with approval from the Bangladesh Bank. Overdrafts and short-term loans can be taken against these accounts following the central bank's guidelines for forex transactions.

Sonali, EBL apply to open nostro accounts

Sonali Bank and EBL have already applied to the Reserve Bank of India for opening nostro accounts, according to officials of the two Bangladeshi banks.

A nostro account refers to an account that a bank holds in a foreign currency in another bank. nostros, a term derived from the Latin word for "ours", is frequently used to facilitate foreign exchange and trade transactions.

Talking to The Business Standard, EBL Managing Director Ali Reza Iftekhar said, "The Bangladesh Bank has given us the approval to open a nostro account in Indian banks."

Accordingly, an application has been sent to the Reserve Bank of India for opening a nostro account in the State Bank of India, he added.

Amid the dollar crisis caused by the Russia-Ukraine war, there have been talks for months on settling parts of bilateral trade in local currencies, enabling Bangladeshi businessmen to sell goods or services to Indian counterparts for rupees.

Similarly, Indian businessmen will sell their goods and services to Bangladeshi businessmen for taka. 

It was discussed that Sonali Bank and EBL will open accounts with the State Bank of India and ICICI Bank. Both the Indian banks will also open similar accounts with the two Bangladeshi banks.

But at one stage of the discussions, the Indian side asked for transactions only in rupee and Bangladesh agreed.

Banks hope to be ready by June

Officials from the two banks concerned hope the banks of the two countries will be able to finish preparations for such transactions by next June. After that, the official announcement will be made regarding the opening of LCs under the initiative.

Banks other than Sonali Bank and EBL will be able to conduct transactions with India through these two banks in this manner.

"Initially we said the Indian banks will open vostro accounts in our banks. But now the Indian side says it will not be necessary. Transactions can be done without opening an account in Bangladesh," Ali Reza said.

A vostro account is an account held by a foreign bank in domestic currency at our bank.

"Many transactions will not be possible in the beginning. You have to proceed step by step. As much as rupees will be available against Bangladesh's exports, the liabilities of import from India has to be paid with the same amount of rupees," said Ali Reza Iftekhar.

In the fiscal 2021-22, Bangladesh's exports to India amounted to $2 billion, while imports from India to Bangladesh were approximately $13.69 billion. Over the past two years, Bangladesh's exports to India have increased, and it is expected that the volume will further increase.

Majbaul Haque, executive director and spokesperson of Bangladesh Bank, recently told TBS that the central bank of India had issued guidelines for direct transactions in rupees several months ago.

"Bangladesh has reviewed the matter in the light of this decision of the Reserve Bank of India and has taken a policy decision to conduct bilateral transactions in rupees."

In a commerce minister-level meeting of the two countries held in New Delhi in December last year, the Indian side gave a verbal proposal to use their rupee in bilateral commercial transactions. Bangladesh then asked India to make a formal proposal.

RBI, the Indian central bank, in a circular on 11 July last year, has allowed international trade transactions to be settled in rupees. It is said that all import-export transactions will be in rupee. The exchange rate between the two countries will be market-based.

India trades in rupee with 18 countries 

In March, Indian Union Minister of State for Finance Bhagwat Krishnarao Karad told the Rajya Sabha that the Reserve Bank of India has already arranged for trade with 18 countries to be settled in rupees. 

This arrangement has already started with Malaysia. India wants to increase the value of the rupee in the international market. For this, the country has initiated discussions with several countries, including Russia, besides Bangladesh.

Bangladeshi businessmen and analysts, however, recommended proceeding with caution about this and said this arrangement may create dependency on rupee.

Besides, Bangladesh has a big trade deficit with India and therefore, it may be at risk in dealing in rupees.

Businessmen, bankers express apprehension

A businessman, on condition of anonymity, said he fears that at some point it will be seen that banks in India are not accepting LCs in any currency other than rupees. Then rupees have to be bought with dollars and in that case, the exchange rate may suffer losses.

A banker also thinks so. He said the raw materials of the products that are being exported to India are imported from other countries. 

"Where will the exporter get the money to import the raw material by exporting in rupees? There is doubt if any bank will be found in the country to buy dollars with rupees. As a result, such initiatives will take time to succeed." 

And exports to India should increase, he added. 

Of late, there have been discussions in countries around the world about free trade agreements and currency swaps to increase bilateral trade. Asian Clearing Union (ACU) countries are negotiating payment of import duties in their own currencies.

Last year, Bangladesh Bank approved the opening of LCs in the Chinese currency yuan. Some banks including Uttara Bank have opened such LCs. Bangladesh is also working on signing a currency swap agreement with Russia.

Amid the rise in commodity prices due to the Russia-Ukraine war, several countries are facing a dollar crisis. Apart from this, due to geopolitical reasons, different countries around the world are becoming interested in doing transactions in their own currencies, avoiding the dollar. India also wants to increase international transactions in its currency.

The BRICS countries – India, Russia, China, Brazil and South Africa – have also started discussions on starting import and export in their own currencies, avoiding the dollar. Saudi Arabia has also decided to export fuel oil to China in yuan.

Economist advises proceeding with caution

Executive Director of South Asian Network on Economic Modeling (Sanem) Selim Raihan thinks the initiative to trade in other currencies other than the dollar is fine in the current foreign currency crisis. 

"And it is better if it can be done with a big trading partner like India. But we need to check how realistic it is for Bangladesh. Because the import of Bangladesh from India is about 15 billion dollars. And Bangladesh is exporting 2 billion dollars to India," he said.

"Where will Bangladeshi traders or banks get enough rupees to pay the entire import bill from India? If rupees have to be bought with dollars, it needs to be reviewed," he added.  

On the other hand, Indian currency is not an internationally convertible currency. Therefore, the rupees available against exports to India cannot be used to meet the liabilities of any other country.

For this reason, Selim Raihan says, Bangladesh should do the transaction in rupees as much as it will get from export to India. If the rupees earned by Bangladesh can be used to import from India, it will reduce the pressure on the dollar.