Fair Trade Versus Unfair Exchange

Any Rupee-Rouble Payment Agreement Would Have Some Benefits, But Also Potential Pitfalls

- Srikanth Srinivas

HISTORY DOESN'T JUST repeat itself, it endures. Consider the rupee-rouble agreement, discussed in every decade from the 1950s, through the 1960s, '70s, '80s, '90s, and the 2000s, up to as recently as 2017. And here it is again now, in 2022. It has been contested, hotly negotiated, and frequently renegotiated. Yet, issues have persisted.

In 1961, the then Reserve Bank of India (RBI) Governor, H.V.R. Iengar, wrote to then Prime Minister Jawaharlal Nehru highlighting the risks associated with the 1957 rupee-rouble agreement with the erstwhile USSR. He raised the same concerns about similar agreements signed with some East European countries, wherein we also paid for imports with non-convertible rupees.

RBI officials had found evidence of switch trading or‘shunting', where Indian exports paid for with those non-convertible rupees to Poland, Yugoslavia, Czechoslovakia, and Hungary were diverted or re-exported to hard currency countries. While not illegal, the central bank believed those actions went against the spirit of the bilateral currency agreements.

In response, Nehru wrote a two-page, hand-written note brushing aside those concerns. He instructed the Ministry of Finance to ignore the Governor's views, saying “political compulsions far outweigh the economic considerations in this relationship. The RBI was largely excluded from the policymaking side of this relationship. The central bank did not participate in the negotiations after that, other than as an advisor to the government on certain technical aspects of bilateral trade. A fuller analysis of this period and events can be found in the History of the Reserve Bank, Appendix G. But now, the RBI finds itself leading the current round of talks.