India is preparing to lobby major trading partners including Japan, Iraq and Venezuela to accept rupee payments for some of their exports, one of a series of moves to stabilise the volatile currency and make it more globally acceptable.
Restrictions on large transactions of rupees against foreign currencies are intended to protect India from sustained speculative assaults, but they also limit interest in the rupee and foreign investment flows.
A panel set up in August to study currency swaps has now won support from the finance ministry, the commerce ministry and the central bank to target about 10 countries for such deals, focusing on oil exporting nations and others that run large trade surpluses with India, three sources said.
The panel is likely to decide within the next few days on the size of the swap deals it will seek and finalise which countries to target first, said two sources who have attended meetings. The finance ministry has already agreed in principle to lobby Venezuela to accept rupees for some oil transactions. Another idea is to accept some partners' currencies for trade.
"There is a broad agreement between the commerce and finance ministries and the Reserve Bank of India to push currency swap agreements, particularly with the countries with which India runs a large trade deficit," a senior trade ministry official with the direct knowledge of the issue, told Reuters.
China is already keen to start yuan-rupee trade, and India is hopeful Japan may show an interest in accepting rupee payments. The idea to target oil producers Iraq and Venezuela stems from a rupee payment programme already in place with Iran.
It is not clear how much appetite there will be from the oil nations for the plan -- Iran only accepts rupee payments because sanctions by Western nations limit its options for payment in other currencies.
India's imports from Venezuela were $14 billion in 2012/13, mostly oil, while exports were a meagre $235 million. India's exporters believe a rupee payment deal could drive exports of medicine, engineering goods and IT services to Venezuela, mirroring trade with other Latin American countries.
Japan recently agreed to extend an emergency currency swap facility with India to $50 billion from $15 billion. The new proposal would be separate from that deal and would focus on trade, the commerce ministry official said.
India has over a period of years been loosening capital controls and allowing foreigners to invest in more rupee assets. The move to full convertibility got fresh impetus when the rupee crashed 20 per cent against the dollar earlier this year. It is still down about 12 per cent.
"This might be a strange time to talk about rupee internationalization, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees," Reserve Bank of India Governor Raghuram Rajan said after taking charge of the RBI in September.
An important step towards internationalization came earlier this week when the World Bank's IFC arm issued its first rupee bond to the value of $160 million, part of a new $1 billion offshore rupee bond programme.
The bond was strongly oversubscribed, the IFC said.
The plan to target more countries for rupee payments is also part of India's efforts to tap new markets for exports, which constitute nearly a quarter of the $1.8 trillion economy.
India's trade deficit widened to a record $190 billion in the 2012/13 fiscal year as the gap with major trade partners such as China soared to $40 billion, and the combined deficit with South Korea, Japan and Venezuela touched $30 billion.
"Bilateral currency swaps will offer a win-win situation and would ease pressure on the volatile rupee," said Rafeeq Ahmed, president of Federation of Indian Export Organisations (FIEO).
Ahmed, however, was sceptical of fast progress on the plan.
"It has long way to go and it can take a minimum of six months to operationalise a swap agreement," said the FIEO president, adding swap deals required political commitment and a push from the central bank.
The sharp fall in India's currency value and economic slowdown could discourage oil-exporting nations from making swap deals. Despite importing $2.5 billion of goods between April and September via the rupee channel, Iran recently asked India to pay for oil in other currencies.