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Curbing volatility: India, South Africa plan to settle trade in local currencies

NEW DELHI: India may secure South Africa's approval for setting up a mechanism to settle bilateral trade in local currencies, a move aimed at reducing dependence on thedollar and countering exchange rate volatility.

Commerce and industry minister Anand Sharma said he discussed the proposal with his South African counterpart 
Rob Davies during his visit to Johannesburg last week. "Rob Davies and I have discussed about settling payment in local currency. That is the way forward," Sharma told ET. 

India's trade with 
South Africa stood at $14 billion in 2012-13, with a deficit of about $3 billion. The move comes at a time when a task force under the commerce ministry is evaluating options to reduce trade dependence on the dollar and identify countries with which India can enter into such an arrangement. 

The task force, headed by additional secretary in the 
commerce department Rajeev Kher, is looking at two models to reduce the country's dependence on the dollar for trade—the vostro nostro account and the traditional swap model. A vostro account is an account held by a foreign bank in a local bank. The reverse of this is a nostro account. 

Trade between two countries can be settled in local currencies through these accounts. Under the traditional swap model, a fixed corpus can be held in rupee terms, say, in one of China's banks and a similar amount in renminbi with an Indian bank to settle trade payments.

Settlement in local currencies can also work in cases where Indian banks have branches in the trading partners' country and vice versa. For instance, South Africa has presence of Indian banks, so a South African importer can pay in rands to an Indian bank in South Africa, while the Indian exporter will receive payment in rupees from the same bank in India. 

Officials said the taskforce is identifying countries with which India has a large trade deficit such as China, South Africa and Iraq. It is also identifying countries where Indian banks are operating branches. "Yes, this kind of mechanism can work very well with South Africa as a few Indian banks have bank branches there, and also their currency rand has suffered a sharp depreciation like the rupee," said Ajay Sahai, director general and CEO, FIEO. 

Indian rupee and the South African rand were among the currencies in developing economies that saw a steep fall against the dollar recently following concerns that the US Federal Reserve may withdraw its stimulus programme.