Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How India's Rupee Trade Is Reshaping Global Commerce
Transcript
- Lucas: Luna, I want to talk about something that's quietly reshaping a big chunk of global trade, and it's happening in plain sight: India's push to settle more of its international trade in rupees. Luna: The rupee trade. I've seen the headlines, but I honestly wasn't sure how much real traction it has. Is this India trying to dethrone the dollar? Lucas: That's the big question. Let me anchor this with a number. As of June 2026, India's trade deficit with China alone is over $60 billion annually. Most of that is invoiced in dollars. But the Reserve Bank of India has been building a mechanism—since 2022, actually—that allows exporters and importers to settle in rupees through special vostro accounts. Luna: So instead of converting rupees to dollars to yuan, you just go rupee to yuan directly? Or rupee to ruble, depending on the trade partner. Lucas: Exactly. And the early adopters have been telling. Russia, after the sanctions, became a natural test case. India's oil imports from Russia surged—they were buying something like two million barrels a day at peak—and a chunk of that was settled in rupees. By early 2025, about 10 to 15 percent of India-Russia trade was rupee-ruble, bypassing the dollar entirely. Luna: That's significant, but it's also a special case because Russia needed an alternative. What about trade with other partners? Lucas: That's the real test. India has signed rupee trade agreements with about 20 countries—including UAE, Sri Lanka, Bangladesh, and some African nations. But the actual usage is still small. The RBI's data from late 2025 showed rupee trade settlement at roughly 2 to 3 percent of India's total merchandise trade. That's up from virtually zero three years ago, but it's still a drop in the ocean. Luna: Right, but 2 percent of India's $1.6 trillion in annual trade is still thirty-odd billion dollars. That's not nothing. Lucas: Not nothing at all. And the trajectory matters. The RBI has been adding new features—allowing surplus rupee balances to be invested in Indian government bonds, which makes it more attractive for a trading partner to hold rupees. If you're a Sri Lankan exporter selling tea to India, you can now keep those rupees and earn a yield rather than converting them back. Luna: So there's a financial incentive beyond just avoiding the dollar. But does this actually reduce India's exposure to dollar volatility? I mean, the dollar is still the dominant invoice currency for oil, for instance. Lucas: It does, but only at the margin. Look, the dollar's share of global FX reserves is still around 58 percent. The rupee isn't challenging that. But for India, which imports about 85 percent of its oil, every percentage point of trade settled in rupees reduces the demand for dollars. That helps support the rupee's exchange rate. And with the dollar index still elevated—last week it was around 118.9—that's a real concern for import-dependent economies. Luna: And the rupee itself has been relatively stable compared to, say, the yen. The yen is at 159 to the dollar right now, the rupee is around 83.5. That stability makes it more credible as a settlement currency. Lucas: Exactly. The rupee's low volatility is a selling point. Compare that to the yuan, which has been weakening against the dollar—trading around 6.77 per dollar recently. Chinese exporters might prefer to invoice in rupees if they think the yuan will depreciate further. But that's a double-edged sword. Luna: Because if the rupee strengthens, Indian exporters get squeezed. So there's a natural limit to how fast this can grow. Lucas: Right. And that's why the RBI is being methodical. They're not trying to force it. They're building the plumbing. One of the smartest moves was linking the rupee settlement system with the Unified Payments Interface—UPI—which is already incredibly popular in India and has been extended to countries like Singapore, UAE, and France. So a tourist from India can pay in rupees in Dubai via UPI, and that creates a demand for rupee settlement on the merchant side. Luna: That's clever—piggybacking on a consumer payment system to build trade settlement liquidity. It's almost like the reverse of what China did with the Belt and Road. Lucas: China used infrastructure lending to push yuan internationalization. India is using digital payments and trade agreements. And there's another angle: India's pharmaceutical exports. India is the world's largest supplier of generic drugs, exporting about $25 billion worth annually. If more of that can be invoiced in rupees, especially to African and Southeast Asian buyers, that creates a natural currency circulation. Luna: I want to push back a little. The biggest barrier to rupee trade is that the rupee isn't fully convertible. Capital controls mean foreign investors can't freely move rupees in and out. Doesn't that limit adoption? Lucas: It does. But the RBI has been gradually liberalizing. In 2025, they allowed non-resident investors to participate in the rupee trade settlement mechanism without the usual restrictions, as long as the funds come from trade. That's a targeted opening. And the International Financial Services Centre in GIFT City is designed to be an offshore rupee hub where convertibility is easier. Luna: So it's a phased approach. First, get the infrastructure in place, then gradually ease capital controls. But let's talk about the bigger picture: Is this about de-dollarization or just diversification? Lucas: I think it's more pragmatic than ideological. India's central bank governor has said explicitly that they're not trying to replace the dollar. They want to reduce friction and reduce dependency. And if the dollar faces a crisis—say, a U.S. debt ceiling standoff—India would be less exposed if 10 percent of trade is in rupees versus zero. Luna: That's a hedge, not a revolution. But a smart one. Especially given the U.S. trade deficit. The latest data shows the goods and services deficit widened to over $60 billion in March 2026. That's a lot of dollars flowing out to the rest of the world—which is exactly why countries like India have an incentive to recirculate those dollars elsewhere. Lucas: Right. And the current account deficit for the U.S. was nearly $191 billion in the fourth quarter of 2025. Those dollars end up in foreign central banks, and those banks then decide whether to hold them or swap them. India is essentially saying, 'We'll take some of those dollars and convert them into rupees if you trade with us.' Luna: I want to get into a specific example. Let's talk about the UAE. India and the UAE have a free trade agreement signed in 2022, and they've been promoting rupee-dirham trade. How's that going? Lucas: Pretty well, actually. The UAE is India's third-largest trading partner, with bilateral trade around $85 billion. A portion of oil imports from the UAE are now settled in rupees. And the UAE's central bank has opened a rupee settlement account. The volume is still small, but it's growing. The key is that the dirham is pegged to the dollar, so there's no currency risk for the UAE side—they can effectively convert rupees to dollars at a fixed rate. That makes it easier. Luna: So the UAE is a bit of a friendly test case. What about a tougher one, like trade with China? Lucas: That's the big one. India imports over $100 billion from China annually, mostly electronics, machinery, and chemicals. If even 10 percent of that were settled in rupees, it would be a game-changer. But China has little incentive to hold rupees because their trade with the rest of the world is mostly in dollars or yuan. India and China have had currency swap agreements in the past, but they lapsed in 2024. Without a swap line, Chinese exporters face convertibility risk. Luna: So the real barrier isn't just Indian policy—it's whether the other side wants rupees. And for now, most don't, unless they're sanctioned or have a special relationship. Lucas: That's the honest assessment. But the direction of travel is clear. More countries are exploring bilateral trade in local currencies. Brazil and China, Russia and China, India and UAE. It's a multi-polar world for trade settlement, even if the dollar remains the anchor. And India is positioning itself as a credible alternative, not by competing directly with the dollar, but by offering a stable, liquid, and digitally integrated option within its own sphere. Luna: Lucas, I want to pause here for a moment. I think about why we cover topics like this—the granular mechanics of trade finance, currency settlements, central bank policy. It's not flashy, but it matters. And we do it without ads, which I appreciate. It keeps the conversation focused. Lucas: That's by design. We don't run ads on this show because we want the analysis to be clear, not interrupted by a pitch for a mattress or a meal kit. If these conversations have moved your work forward in some small way, and you want to support that choice, the link is buy me a coffee dot com slash fexingo. Just a coffee, not a subscription. Luna: Exactly. And no pressure. We'll keep doing this either way. But it helps us keep the show exactly as it is. Lucas: Alright. Back to the rupee. So where does this go from here? I think the next milestone is when India starts settling more of its oil imports from non-Russian sources in rupees. If Saudi Arabia agrees to take rupees for oil—and there have been talks—that would be a breakthrough. Luna: That would be huge. But Saudi has historically been very dollar-centric. Would they do it? Lucas: They might, if India offers something in return—like preferential access to its market for Saudi investment, or a swap agreement. India is also the world's third-largest energy consumer, so they have leverage. And with the U.S. becoming a net oil exporter, the strategic rationale for Saudi to hold dollars is diminishing. They're diversifying their own reserves. Luna: So it's a slow burn. But the infrastructure is being built, and each new bilateral agreement adds a brick. I think what's most interesting is that India is doing this without making a big geopolitical statement—just quietly building the plumbing. Lucas: Exactly. And that's why it's worth watching. Because if the rupee trade reaches 5 percent of India's total trade by 2027, that's roughly $80 billion settled in rupees. That creates a pool of rupees outside India that needs to be invested, which feeds back into Indian bond markets and deepens financial markets. It's a virtuous cycle. Luna: And it's a cycle that doesn't require the dollar to fall. It just requires more options. Which is ultimately good for global trade—more currency choices reduce systemic risk. Lucas: Right. The dollar isn't going anywhere, but the world is becoming more multipolar in trade finance. India's rupee trade is a small but significant part of that story. And I think we'll look back in five years and see this as the moment when the seeds were planted. Luna: Well, I'll be watching the data. Next up, we'll look at whether the euro is gaining ground in trade settlements. But for now, thanks, Lucas. Lucas: Thanks, Luna.