The latest trend in the world of business is to seriously consider and employ the use of currency swaps which would enable the participants to deal with their own currencies and eliminate the need to involve third currency like the US dollar

Due to US sanctions and UN rulings, trade with Iran has caused a lot of headache. However, the triumphant and bold moves made by the Presidents of Iran and the USA forecast a fair chance that some mutually acceptable and workable solution to overcome the impasse may be on the anvil.

Last year, in order to circumvent the obstacles, Iran accepted the rupee as a payment medium for $5.40 billion out of the total of $12 billion, covering our crude oil imports, with the provision that the balance be settled via Turkey and other sources (like UAE), or where they had "free foreign exchange".

In order to facilitate this arrangement, the rupee element was deposited with UCO Bank (United Commercial), headquartered in Kolkata, with four Iranian banks being authorised to have access to these funds.

In this article, the experience of exporters from India and the problems faced by their counterpart importers in Iran will not be covered, as these are highly complicated and efforts are being made by both sides to resolve them. In any case, in the next few weeks, a solution may be found due to overtures made by the Iranian President and the reasonably friendly response from the US.

This will take us back to the original issue of currency swaps. In good old days, India had bilateral rupee trade agreements mostly with the East European block, and slowly, the economic progress of the involved nations made it possible for them to switch to hard currency payments.

Now, the latest trend in the world of business is to seriously consider and employ the use of currency swaps which would enable the participants to deal with their own currencies and eliminate the need to involve third currency like the US dollar. This is recommended for use between two nations when they have large volume of trade worth billions of dollars.

If we truly wish to make the rupee internationally accepted, it is time all our offers are made in rupees, just as matter of practice. Japanese have always quoted in Yen and the Chinese insist on Yuan! British offers were always in Pounds!

As for as India is concerned, we need to study the possibility with two of our giant neighbours in trade: China and Japan. For the time being, we must look at China as the prime example, as our trade has grown substantially in the last few years.

In 2012, our trade with China involved a total transaction worth $66.47 billion. Out of this, Chinese exports to India amounted to $46.47 billion while their imports from India amounted to $18.80 billion, leaving India with a deficit of some $29 billion!

In addition to this, the Chinese Ministry of Commerce had approved $725 billion of direct investments from China in non-financial projects in India while Indian companies had actually invested $486 billion in 800 non-financial projects in China. These figures are astronomical, considering our initial conservative approach to trade with that country due to our rather unfortunate political experience in the past. Political situation has not improved yet, despite assurances by the Chinese leaders.

It would be great idea if the Government of India made some serious efforts to propose a workable currency swap arrangement with China. It would be ideal to have a Rupee-Yuan (or Reminbi) swap arrangement with a value limitation of say $25 billion, considering the current Chinese imports at $18.80 billion as the base figure.

Taking this as an example, as the dollar-rupee exchange rate is at Rs61, one billion (in US dollars) would amount to Rs6.10 lakh crore. The rupee-reminbi exchange rate is at the moment Y1 equals Rs9.98. For the sake of convenience, we take it as Y1 equals Rs10, the yuan element would amount to Y61,000 crore. So, if we target $25 billion worth of turnover on either side, we have an export projection of Rs15.25 lakh crore or Y152,500 crore of imports by China.

How will this operate? If we take the export of iron ore from India at the current international price of $100, we would offer the same at Rs6,100 per tonne fob basis, thus eliminating the dollar quotation as a start. At the same time, the importer in China will be paying Y610 per tonne to the bank. Later, the actual freight and related insurance costs etc will be met at actual cost.

In such a transaction, each country will have to nominate one bank to keep track of all payments and receipts. Modalities and documentation required on either side will have to be worked out in great detail, based on our own experience in the Iranian rupee deal.

Once the trade target of $25 billion, as mentioned above, is reached, either party will have to pay in third currency like the US dollar for imports over the limit. So, only at this point of time, a third currency will get involved!

The only catch in this proposal is that, in the case of China, which has a favourable balance of trade, it can still increase its exports to India. On its participation in international tenders (like the locomotives project worth Rs35,000 crore or about $6 billion), it can offer credit and accept payment in rupees, under this swap arrangement.

It will be observed that in making this proposal, we have to bear in mind that, so far, China had diligently avoided floating its yuan internationally. This will imply controlling the exchange rate, a move that the US has consistently challenged without success. But, in the event such a swap arrangement is entered into between India and China, both countries will have to establish a "real and acceptable value" for their exchange rate. In this case, we have worked on $1 being equal to Rs61.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)