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A former Indian diplomat, who had also served in Bangladesh twice, suggests that India should try to make rupee, the Indian official currency, a legal tender in Bangladesh. "If Rupee is made a legal tender in Bangladesh, as it is in Bhutan and Nepal, we have a Rupee trade area. We can treat the entire region as an integrated economic entity in terms of supply of essential services like food," he was quoted to have said recently on Indian news outlets. The Indian currency is partially legal tender or legally recognised money in Nepal and Bhutan.
What provoked Sarvajit Chakravarti, also a former foreign secretary of India, to put the suggestion is clear. One may find that such a proposal is not new as India has long been trying to make the rupee an international currency like the US dollar or Euro. The first step is getting recognition of the rupee as a regional currency. Two weeks back, the Indian central bank also allowed the country's exporters and importers to settle the bill in rupee as an effort to make it an international currency. If some Indian trade partners accept the rupee as a currency to pay the trade bills, it will help India reduce the exchange-rate pressure on its official currency. India already has some experience in the trade in its currency with Iran. Now, the western sanctions on Russia, following the Russia-Ukraine war, have provoked countries like China and India to trade in their currencies with Russia to bypass the taboo of sanctions. Nevertheless, India has yet to make any trade deal with Russia in rupee as Russia prefers its own currency, the ruble. Moreover, Moscow has requested Delhi to settle some import payments in the United Arab Emirates' (UAE) dirham.
There was also a move to trade in the Russian ruble to avoid the western sanctions involving Bangladesh. The action, however, did not progress for some practical reasons. Now, when the country's balance of payments (BoP) comes under strain due to costly imports and macroeconomic mismanagement, a suggestion to use the Indian currency is seen by a few as a tool to reduce some pressure. Nevertheless, many risk factors are there, and Bangladesh is not in a position to move ahead without carefully examining the pros and cons of such an arrangement.
It is to be noted that Chakravarti's thoughtful use of the term 'legal tender' implies many things. Theoretically, legal tender is not only the legally recognised money within a given political jurisdiction but also the relevant laws effectively preventing the use of anything other than the current legal tender as money in the economy. Moreover, legal tender 'serves the economic functions of money plus a few additional functions, such as making monetary policy-and currency manipulation possible.' So, by accepting the Indian rupee as a legal tender, Bangladesh has to abandon its own currency, taka, to be precise. Ultimately Bangladesh Bank has to sacrifice its monetary policy in favour of the Reserve Bank of India (RBI) if the rupee becomes a legal tender in Bangladesh. Such an arrangement will ultimately lead to compromising the country's national sovereignty.
Currently, the rupee is not widely used in the foreign- exchange market for international transactions, and chances are slim that it will be accepted as a global currency all too soon. However, many things are needed to do so, including full convertibility of India's capital account. At present, India's capital account is partially convertible. However, it also requires 'low and stable inflation, low ratio of bad loans in the banking system, stable exchange rate, low fiscal deficit, and a moderate current- account deficit.' So, India will need more time and effort to fulfil the conditions.
It should be noted that the idea of a common regional currency was mooted long ago. About a decade ago, late AMA Muhith, the former finance minister, said that Bangladesh and India should work together to introduce a common currency in the South Asian region. Little progress has been made in this regard. The dysfunctional South Asian Association for Regional Cooperation (SAARC), mainly due to the rivalry between India and Pakistan, reduces the scope of a common currency in the region. Moreover, taking advantage of the size of its economy, India is trying to make the rupee into the regional commom currency. Therefore, it is in India's economic interest to push the agenda of making rupee a regional currency. But Bangladesh has little benefit in such an arrangement.
As the bilateral trade balance is heavily tilted towards India, settling the bills in rupee will be obviously beneficial to India. In FY21, Bangladesh's export to India was worth US$1.27 billion against $8.60 billion in import from India. Thus, the bilateral trade deficit with India stood at $7.31 billion, which was $4.70 billion in FY20. And in the last fiscal year, FY22, the trade gap crossed $10 billion due to a big jump in imports from India. Therefore, if Bangladesh wants to settle the bill in Indian currency, the country will have to purchase rupee equivalent to US$10 billion additionally from the foreign-exchange market, which will be costly.
An alternative may be a limited-scale currency- swap arrangement on a test basis for the time being. It is an 'agreement between two central banks to exchange a cash flow in one currency against a cash flow in another according to predetermined terms and conditions.' However, this is also unlikely to benefit Bangladesh due to the difficulty in setting the limit. Instead, Bangladesh needs to push India to expedite the Asian Clearing Union (ACU) settlement process, which was introduced more than four decades ago. The ACU mechanism has already proved beneficial to its member- countries.
Finally, Bangladesh may think of using its currency, Taka, to settle a portion of international trade bills. Though it sounds pretty ambitious, it is possible to pay a tiny amount of its global trade bill in the local currency with a few small trading partners like Nepal or Sri Lanka. The move will help to reduce the growing pressure on the exchange rate.