Bangladesh and India are all set to introduce the rupee as a means of transactions in bilateral trade, marking a significant shift from the traditional reliance on the US dollar.
According to sources, the new transaction tool is likely to be inaugurated in the second week of July. The authorities on both sides are now preparing to hold separate events in their respective capitals to mark the launching. A responsible source at Bangladesh Bank mentioned 11 July as the probable date of the inauguration.
However, the dollar-based transaction system will remain in place, alongside the new developments.
The two sides have been in negotiations over currency swap arrangements for nearly a decade. The currency swap method refers to carrying out cross-border transactions in own currencies, bypassing the use of the US dollar or any other powerful currencies.
Bangladesh Bank has recently granted permission for Sonali Bank and Eastern Bank to open nostro accounts in India's State Bank of India (SBI) and ICICI Bank, in order to facilitate bilateral trade in rupees. The nostro account refers to an account that a bank holds in a foreign currency at another bank to facilitate foreign exchange and trade transactions.
It was learnt that the four banks are still in negotiations over opening the nostro accounts.
Ali Reza Iftekhar, managing director of Eastern Bank Limited, said the current focus is on introducing trade in Indian rupees and it will be followed by the issue of using taka in bilateral trade.
The central bank of India – Reserve Bank of India (RBI) – has already permitted Eastern Bank to open nostro accounts, while Sonali Bank is expected to receive the approval within the next few days.
Bangladesh Bank sources said the issue of opening vostro accounts – a bank account held by one bank on behalf of another bank in a foreign currency – is not being considered for the time being. It will be tabled during negotiations over using taka in bilateral commercial transactions.
In Dhaka, Bangladesh Bank governor Abdur Rouf Talukder is likely to inaugurate the rupee-based transaction, where RBI governor Shaktikanta Das and SBI top officials would join virtually.
On the other hand, the Indian authorities may hold a separate event marking the rupee-based transaction with Bangladesh.
Afzal Karim, managing director of Sonali Bank, said, “We both have preparations. It is likely to commence bilateral trade with India in rupee by the middle of next month.”
Trade figures reveal a robust economic relationship between Bangladesh and India. According to the Bangladesh Bank data, Bangladesh imported goods worth USD 89.16 billion in the fiscal year 2021-22, with USD 13.69 billion originating from India.
Conversely, Bangladesh exported goods valued at USD 1.99 billion to India during the same period. The overall trade between the two countries reached USD 15.68 billion in the fiscal year.
The outgoing 2022-23 fiscal year also posted a similar trend in bilateral trade.
Taskeen Ahmed, vice chairman of Ifad Group and former president of India-Bangladesh Chamber of Commerce and Industry, underscored the need to explore alternatives to the US dollar in the face of emerging challenges.
Exports to India roughly amount at USD 2 billion and Bangladesh can potentially conduct this transaction in rupee, he said, adding that essential products, including food items, should get priority while importing under a rupee-based transaction system.
However, the exchange rate of rupee against the US dollar is yet to be finalised.
Amid an acute dollar crunch triggered by the Russia-Ukraine war, a trade minister-level meeting was held between Bangladesh and India in Delhi last December. Here, India proposed the use of taka and rupee as a medium of bilateral trade.
Later, the central bank governors of both countries met during the conference of finance ministers and governors of G-20 countries in Bengaluru on 24-25 February and agreed to expedite the execution of the currency swap arrangement.
In a conversation with Prothom Alo on Wednesday, commerce secretary Tapan Kanti Ghosh said, “Bangladesh Bank is now taking care of the issue. However, it is true that we are waiting to see the issue take shape.”
The Indian currency is not widely recognised as a global currency. Besides, there is a remarkable trade deficit between Bangladesh and India. Once the process begins, it will extend beyond commodity trade and expand to different areas, such as travel, medical expenses, and education.
Against such a backdrop, there is apprehension regarding any potential risks the country may face while dealing in rupees.
While announcing the new monetary policy on 19 June, the central bank governor declared the introduction of a new debit card – Pay Card – for transactions in rupee as well as taka.
In addition to local transactions, the Pay Card users will have the convenience of spending up to USD 12,000 worth of rupees while traveling to India, he said.
Mustafizur Rahman, distinguished fellow of the Center for Policy Dialogue (CPD), underscored the need to consider the potential risks in conducting bilateral transactions with a large economy like India in rupee.
However, Bangladesh may initiate bilateral trade using rupees equivalent to its exports to India, USD 200 billion, he said.
The noted economist called for caution over determining the exchange rate and said Bangladesh should not suffer losses in this respect.
He, however, described the diversification in foreign trade through the introduction of rupee-based transactions as a positive development.