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India-Russia Trade and Investment in Rupees



  May 08, 2024

India-Russia Trade and Investment in Rupees



1. Why are India and Russia trading in rupees?

Traditionally, international trade is often conducted in widely accepted currencies like the US dollar. However, due to Western sanctions on Russia, it has become challenging for Russia to use these currencies. As a solution, India and Russia have agreed to use the Indian rupee for their trade. This helps Russia continue trading despite sanctions and allows India to pay in its own currency.

2. What is a vostro account?

Think of a vostro account as a type of bank account that a foreign bank (like a Russian bank) holds in another country's bank (like in India) using the local currency (rupees in this case). This account is used by the foreign bank to manage money that it earns in that country. For India and Russia, these accounts help facilitate trade directly in rupees without needing to convert to other currencies.Major Russian banks have opened vostro accounts with Indian banks such as UCO, HDFC, and ICICI to support this mechanism.

3. Why does Russia need to invest its rupee earnings in India?

When Russia sells goods to India, like oil or defense equipment, it earns a lot of rupees. Instead of just letting these rupees sit unused, investing them in India makes sense. This can be in government bonds, real estate, or other markets. It's like using the money you have in your bank account to buy things that can grow in value over time.

4. What kinds of investments can Russia make in India?

Recently, India made it easier for Russia to invest in different financial instruments. These include government securities (like loans to the Indian government that earn interest), corporate bonds, and stocks in Indian companies. This variety helps Russia choose where to invest based on what they think will be most beneficial.

5. How significant is the trade between India and Russia?

Trade between India and Russia has been growing significantly. Russia is a major supplier of oil and military equipment to India, which are critical for India’s energy needs and security. As of 2023-24, India's imports from Russia increased significantly, showing how important this relationship is.

6. How do the new investment options help with trade payments?

By allowing Russia to invest its rupee earnings in India, it ensures that the money stays within India and can be used to pay for Russian imports. This helps streamline the financial transactions between the two countries and reduces the need to use other international currencies.

7. Are there any concerns with these investments because of international sanctions?

The investments made by Russia in India are structured to avoid any issues with Western sanctions since they do not involve transactions in US dollars or other international currencies. This makes it a safe strategy for Russia to utilize its funds without facing financial penalties from Western countries.Russia became India's second-largest source of imports after China. In the fiscal year 2023-24, India's imports from Russia increased by 32.95% to $61.44 billion, mainly comprising oil, defense equipment, fertilizers, and precious stones.

These FAQs are designed to help beginners understand the basic principles behind the evolving economic relationship between India and Russia, focusing on recent developments in trade practices and investment strategies.




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