Bangladesh and India entered a new era of relations Tuesday with the launching of the rupee in bilateral trade amid global volatility of the US dollar.
State Minister for Foreign Affairs Md Shahriar Alam termed it a "successful story” between the “trusted neighbours", while Indian High Commissioner Pranay Verma called it a “very important beginning”.
Businesses of both countries have long been demanding the option to use the rupee along with the US dollar for trade. The demand gained momentum following the Covid pandemic, post-Covid recovery struggles, and the Russia-Ukraine war, which have severely hurt almost all economies.
“The situation tempted us to rethink and review a way out to minimize over-dependency on reserve currencies,” Bangladesh Bank governor Abdur Rouf Talukder said at the launch.
Tamim Agro Industries is the first company in Bangladesh to open an export letter of credit (LC), worth 16 million rupees. Nita Company Ltd is the first exporter of India, opening a 12-million-rupee LC under the new mechanism.
What's the mechanism?
The rupee has been selected as the means of business since India dominates in two-way trade. Bangladesh exports $2 billion worth of products while it imports more than $14 billion.
Under the new plan, two banks in each country - Bangladesh's state-owned Sonali Bank Ltd and the private Eastern Bank Limited (EBL), and India's State Bank of India (SBI) and ICICI Bank - have been allowed initially to settle trade transactions in Indian rupee.
They opened nostro accounts, meaning an account opened by a bank of one country in another country for foreign currency transactions.
Indian importers can open LCs in those two Indian banks to import goods from Bangladesh in rupees. Similarly, Bangladeshi importers can open LCs in those two selected Bangladeshi banks to import products from India in rupees.
The rupee-taka exchange rates will be decided on a cross-currency basis by individual banks. Settlements will happen through the SWIFT mechanism between countries and the RTGS mechanism within the countries for crediting exporters' accounts.
“We export $2 billion worth of products and import $14 billion from India. With the new initiative, we will be able to pay the import bill with the rupees that we earn from exports,” Bangladesh's apex chamber FBCCI President Md Jashim Uddin said. “This will reduce pressure on our foreign reserves.”
Excess balance can be repatriated in freely convertible currency or the currency of the beneficiary trading partner country.
A new era in relations
Relations between Bangladesh and India have come a long way in the last 10 years. Prime Minister Sheikh Hasina and her Indian counterpart Narendra Modi have referred to them as a “golden era” (Sonali Adhyay) of the bilateral relationship. Both countries have been working to restore historical links that existed before the 1965 India-Pakistan war.
"We have actually exceeded that era," State Minister Shahriar Alam said, referring to the launching of the rupee-based trade which did not exist in 1965.
“It's a successful story between the two trusted neighbours. This opens a new era in our relationship," he said while launching the India desk at EBL Bank.
Reducing the cost of doing business
Indian High Commissioner Pranay Verma said the new scheme will provide “speed, efficiency, and convenience” to the business community of both sides.
“It will reduce transaction cost, and transaction time for settlement of trade. It will make our trade more competitive, which also creates new incentives for Bangladesh exporters to promote exports to India. So overall it's an initiative where we are providing new options to the business community,” he said.
“We are actually increasing the ease of doing business, reducing the cost of doing business. Overall, I think we are creating comfort in dealing with our own currencies and minimizing reliance on other currencies. This is a very important beginning,” he said.
The high commissioner said there was a demand for such a mechanism from businesses, particularly in Bangladesh. “We are happy that we have been able to do that.”
“It's going to play a very important role in promoting our trade and economic ties. Today Bangladesh is the largest trade partner of India in South Asia. Our trade volumes have doubled in the last five years. Bangladesh has also found a very reliable market for its exports in India. Bangladesh's exports have been consistently growing. This has crossed $2 billion. We are the largest export market for Bangladesh in Asia. We want that number to grow,” the envoy said.
Normalizing complexities
Bangladesh's dollar reserves have shrunk by more than a third since Russia's February 2022 invasion of Ukraine to stand at a seven-year low of $31.60 billion.
The value of Bangladesh's taka also suffered the steepest fall in a decade.
“The global financial community is still experiencing difficulties in trade payment settlement due to growing geo-political complexities. This effort might help to normalize and minimize the complexity,” the Bangladesh Bank governor said.
He said the successful operation of this mechanism will help Bangladesh lessen the pressure on its forex reserves, reduce transaction costs and promote bilateral trade between the countries.
This mechanism will also pave the way for further alternative payment-related policy design and mechanism, the governor said.
“We are in the process of making our own national card (debit card). We are expecting to launch it by September. We are also working with the Indian (central bank) side. If they allow us, we will be able to convert it and kick-start the dual currency card by December this year,” he said.
Success rests on use
The Indian high commissioner, however, said the extent to which the new trading plan will be used will be limited at the beginning.
“The success of this rests on how well we make this information available to businesses and how widely they use this. It matures as we gain experience using this channel. I am sure there will be more improvements in the system,” he added.
As Bangladesh will become a developing country in 2026, the high commissioner said both countries are doing a lot of things together “to capture new opportunities from this new reality”.
“One of them is the comprehensive economic partnership agreement (Cepa) that we are going to negotiate shortly and the other is the mechanism that we have put in place today. This is a very innovative way to improve our bilateral trade structure,” he said.
The Indian rupee is the second currency after the Chinese yuan that the Bangladesh government is using as an alternative to the US greenback.
Bangladesh Bank in a circular in September last year allowed commercial banks to maintain accounts in yuan with their corresponding branches abroad to settle cross-border transactions where needed.
