Currency valuation key for pegging rouble-rupee exchange rate, experts say

The exchange rate between the rupee and the Russian rouble for bilateral trade will be decided in consultation with the Russian government as the exchange rate will have to be pegged in which both the countries' central banks will be involved, say experts. 

The valuation is actually a key issue for pegging the rouble-rupee exchange rate. 

"All the global currencies are coded against the dollar only. If there is no way to know the dollar -rouble rate, there is no way to know rupee-rouble prices either. In that case, "it no longer remains a settlement issue, it becomes a valuation issue, what is the right price of rouble at which the conversion should take place," says Abhijeet Awasthi, a global currency expert.

The Reserve Bank of India (RBI) alone can't decide the rouble -rupee exchange rate by themselves. The central bank, in consultation with the government, has to arrive at an exchange rate.

The Russian rouble has depreciated sharply against the US dollar post the Ukraine conflict, whereas the Indian rupee has depreciated marginally.

The rouble has depreciated to 110 to a dollar from being steady at 70-75 all through the last year. The Indian rupee has been range-bound at 72-76 per dollar in 2021 and also post the Russia-Ukraine conflict.

There is every possibility that the rouble will depreciate further in the days to come. 

Does it make sense for India to lock an exchange rate now? India being a net importer will actually gain more if the rouble falls further in the near future. 

The RBI and the government have been exploring bilateral trade and payments in rupee -rouble post the economic sanctions against Russia and also the disconnection of SWIFT, an international payment messaging system, for Russian banks. There are expectations of some sort of announcement this weekend. 

Sugandha Sachdeva, VP- Commodity & Currency Research, Religare Broking, however , says that the payments with Russia shall be made in the Indian rupee for both imports and exports at the prevailing exchange rates via the rupee accounts held with some state-run banks. 

"The recent sanctions on Russia over its invasion of Ukraine will not have an impact on these payments, though any major currency fluctuation will have a bearing on the bilateral trade. On the other hand, since the US has imposed numerous sanctions on trade with Russia in US dollars, such trade will be majorly affected," says Sachdeva of Religare Broking.

"It could also be that part of the settlement between India and Russia be in foreign currency and partly in rupees. Russia uses its own messaging system, the SPFS, and could also use the Chinese System of CIPS for its transactions. But this could have serious implications for the west, which may implicate India in siding with Russia, as we have already abstained on UN resolutions, " says Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.

Experts point out that it is no longer a settlement issue. Abhijeet Awasthi, foreign exchange expert, says this problem ( non-availability of SWIFT ) can be resolved if there is "no mediation of USD in between, but that will require a rupee -rouble direct rate market, which is not the case currently. For Indian banks, their operations are set up for nothing apart from SWIFT. For them to act on any other form of communication, a completely approved process needs to be in place."

"India and Russia had previously agreed to a rupee-rouble trade agreement to protect the two countries from unilateral sanctions imposed by the US, which has imposed several bans on the use of dollars in commerce with Russia," says Kshitij Purohit, Lead of Commodities and Currencies, Capital Global Research Limited.

The global payment messaging system SWIFT has already disconnected as many as seven large Russian banks from its messaging system. The global system SWIFT allows a secure and faster messaging system between banks and financial institutions across the world. Payments messaging amongst multiple currencies takes place over the SWIFT system.

Explaining the SWIFT system, Awasthi says a bank in India requires a rouble nostro arrangement with a bank in Russia and a USD nostro with a bank in US.

A nostro account is a bank account that a bank of one country holds with a bank in another country. When the Indian exporter gets a ruble, it gets credited to the rouble nostro account. A Russian bank will also have a USD nostro with a US bank.

Then the SWIFT comes into the picture. A SWIFT message is sent to debit rouble nostro and credit USD nostro. As the conversion is happening between the two currencies. Here the role of US bank in between becomes important. If it stops recognising SWIFT from Russian banks, then no bank can convert rouble to USD.

Due to the steep crash in the Russian currency, Indian companies are likely to face a longer receivable cycle. In fact , there are also chances of Russian importers defaulting on payments. 

 "The Russian rouble plummeted about 30 per cent against the US dollar," says Purohit of Capital Global Research Limited.

There are some estimates of $400-600 million in payments pending for the exports made by Indian companies. "The environment is highly uncertain, trade impediments are rising, and all future deliveries have been suspended by the major shipping lines. However, the decline in the rouble is a knee-jerk reaction to the geopolitical crisis and could prove to be temporary and short-lived," says Sachdeva of Religare Broking while adding that the rupee-rouble bilateral trade arrangement will certainly alleviate some of the challenges faced by the exporters.

"Indian exporters will definitely lose and importers will gain as earlier the rouble was Rs. 1.05 and now just Rs. 0.77. The government may separately compensate them," argues Bhansali of Finrex Treasury Advisors.

Also read: Ukraine crisis: Rupee tumbles 40 paise to 75.33 against US dollar in early trade

Also read: Indian rupee hits two-and-a-half-month low as Ukraine crisis grows; RBI in focus