Rupee Credit: Should We Consider It?

Rupee credit in favorable rate Boost revenue, chance and trade.

Bangladesh and India formally inked deal to settle part of their bilateral trade in rupee. The agreement will ease dollar demand to some extent. In addition, Bangladesh Bank governor said that dual currency card for the tourists of both the countries will be launched in September¹.

In the face of growing dollar demand, rupee and yuan emerged out as international currencies to settle part of the bilateral trade. Despite having huge trade deficit, limited trade in these two currencies will give some sort of comfort to the govt. A Chinese company had earlier agreed to receive part of the credit repayment in taka to clear the wages of local employees.

Our export to India was $866 millions in 2019-20,$1 billion in 2020-21 and $1.5 billions in 2021-22 respectively². The trend shows export to India grows an impressive rate. Our import is also growing. Now it stands at $14 billions. Since import exceeds export, Bangladesh decided to confine the settlement of bilateral trade in rupee into $2 billions[*]³.

There are arguments to borrow rupee from India to finance the import and later payback the amount along with interest.However, some argued against it as dollar may be used in such deal and it may not be favorable to Bangladesh. I think instead of saying no to such proposal if it is favorable enough we should opt for it.

India is willing to pitch rupee as an IMF SDR currency.More countries trade in rupee,more stronger the idea will become. Bangladesh is a potential manufacturing hub that will cater to the need of growing Indian consumers. Bilateral trade will eventually grow. To narrow the trade deficit, we also need Indian investment.

Trade in rupee paves the path in this regard. If borrowing rupee from Reserve Bank of India or any state or private bank is lucrative then we should think about it.On the other hand,volume of trade done in rupee is a factor that influences rupee’s bid to IMF SDR currency. What does such favorable exchange rate mean?Taka-rupee exchange rate is fairly stable over the years. But dollar-taka and dollar-rupee registered unusual volatility in recent months. Now any credit deal in rupee with Bangladesh has to be done in light of exchange rate higher than the market rate at the time the deal is signed. And by the time when repayment takes place, exchange rate has to be lower than the market rate prevailed at that time. For instance, say $1 dollar fetches 82.90 rupees. Bangladesh would like to borrow $1 dollar worth of rupees for three months. Three months later suppose the market rate will be 85 rupees for $1 . Making sure that credit deal will take off,Bangladesh will be offered 83 rupees for one US dollar during the agreement and will have to repay 84.50 rupees for $1 dollar.Creditor bank will gain 1.50 rupees (interest plus other costs ).And Bangladesh will save 0.50 rupee from $1 trade. For every $1 billion worth of trade Bangladesh will save 50 crores of rupee or $6.03 millions. For a total of $14 billions of trade,it could save $84.42 millions or Taka 920.178 crores every year.Bangladesh could later use the saved money in developing export infrastructure or modernization and automation of trade facility. For India,the advantage is that $14 billion worth of bilateral trade could be done in rupees and this example could be offered to other countries. Large part of unofficial trade will come under official channel as such trade will require documentation. Both the governments will earn revenue from the increase in trade.

Devising a favorable exchange rate could allow such credit deal to take off. Many private companies are familiar with such deal. In fact, part of the reserve ($7 billions) Bangladesh lent to private banks might be used in currency swap abroad as cost of buying dollar was kept artificially low by not raising the interest rate and by not depreciating the taka for far too long. If credit in rupee at favorable exchange rate is on the table, we should grab it without ado.

Notes And References

1. “Dual Currency Taka-Rupee Card From September”, Daily Star,July 11,2023.For more read at https://www.thedailystar.net/business/news/dual-currency-taka-rupee-card-september-3366251
2. Bangladesh Bank
3. “Currency Swap To Ease Dollar Demand”, Rezaul Hoque.May 18,2023.https://hoquestake.blogspot.com/.For more read at https://hoquestake.blogspot.com/2023/05/currency-swap-to-ease-dollar-demand.html?m=1

[Update: This piece has been updated at 14:00 Bangladesh Standard Time on July 18,2023.Update includes insertion of " settlement of bilateral trade in rupee" instead of "bilateral trade".
------Rezaul Hoque]