Though RBI has collaborated with seven countries to link the Unified Payments Interface (UPI) for bilateral payments, this is the first time it has joined a multilateral project, and will connect a potentially large user base
to UPI.

Project Nexus is designed to connect the Faster Payment Systems of four Association of Southeast Asian Nations (ASEAN) countries—Malaysia, the Philippines, Singapore, Thailand—and India and has the potential to add more countries. The five participating countries will be the founding members and first movers of this platform, and have signed an agreement with BIS to this effect in Basel, Switzerland.

The recently completed third phase of Project Nexus involved the participation of the central banks of the four ASEAN nations, domestic IPS operators, and Bank Indonesia, which has special observer status. As part of its fourth phase, RBI will also join the project.

The platform creates an affordable instant payment system, serving as an alternative to global instant payment players that have high transaction costs. It aims to lower costs and expedite international remittances between countries, promoting financial inclusion, economic integration, and scalability, thereby contributing to the G20 Roadmap for Enhancing Cross-border Payments.

Project Nexus standardizes domestic IPS connections, allowing operators to make one connection to Nexus instead of custom connections to each country. Thus, the IPS is connected to all the countries in the network.

To manage the live implementation, the participating central banks and IPS operators will work toward establishing a new entity called the Nexus Scheme Organization, owned by central banks, the IPS operators or both. Finally, BIS will move toward a technical advisory role to enhance cooperation among its members and participants.

UPI is an instant payment platform that enables inter-bank transactions through mobile devices 24/7. With a single mobile application and two-factor authentication, users can access multiple bank accounts, conduct fund transfers and make merchant payments.

NPCI developed and launched its UPI in 2016. The platform has since become India’s most popular payment solution, with more than 117 billion transactions in 2023 and useable for payments in seven countries.

This partnership aims to boost inclusive economic growth and modernize Namibia’s financial system by improving connectivity with domestic and international networks.

Despite having a mature telecommunications market, Namibia is lagging behind its peers in adopting digital technologies. Its financial services sector also continues to lag. The use of online banking is limited, inhibiting access to credit and leading to a dual economy—a highly developed modern sector coexisting with an informal, subsistence-oriented one.

A UPI-like payment system will facilitate real-time payment transactions, along with person-to-person and merchant payment transactions, promoting financial inclusion and reducing cash dependency for underserved populations in rural and informal sectors. It will also help underserved micro, small, and midsize enterprises access finance.

Johannes Gawaxab, the governor of the Bank of Namibia, notes that the central bank aims to enhance accessibility and affordability for underserved populations by achieving full interoperability of payment instruments, modernizing the financial sector, and ensuring a secure national payment system by 2025.

The development of an instant payment system aligns with the bank’s Strategic Plan and National Payment System Vision and Strategy 2025. This reduces infrastructure costs for financial institutions and ensures the sustainability and affordability of instant payment solutions for end users. It also connects individuals, businesses and government entities to support the growth of digital entrepreneurship in Namibia.      

Each time, it has bounced back.

The latest such episode started in 2019 with the ongoing debt crisis, followed by a currency collapse and, in 2022, the fall of the scandal-ridden government of Rajapaksa. Since then, Rajapaksa’s successor, President Ranil Wickremesinghe has presided over yet another tentative economic recovery.

The government’s economic reform plans, including fiscal belt-tightening, foreign-debt restructuring and measures to attract foreign investment, received a vote of confidence in September 2022 when IMF staff and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka’s economic policies with a 48-month arrangement under an Extended Fund Facility of about $2.9 billion. By the third quarter of 2023, after six successive quarters of negative growth, the economy saw a positive turn. The country reported a current account surplus, disinflation, increased revenue and growing remittances from citizens working abroad.

India’s Chandrayaan-3 mission created history by landing safely on the moon at 6:03 PM on August 23, making it the first country to touch the polar region of the moon and the fourth country after the US, Russia, and China to enter the moon.

It is the cheapest mission ($75 million) compared to the Russia’s Luna-25 ($200 million), China’s Chang’e ($219 million) and USA’s Apollo 11 ($152 billion).

“It will have long-term benefits for the economy, especially the private sector to invest and fund new technologies,” says Nitin Sarin, Managing Partner, Sarin&Co.

Future projects like the return to Mars, the study of Venus, and carrying humans into low earth orbit, portends a bright future for the Indian space sector. The country is an inexpensive launchpad for foreign countries. It launched 424 foreign satellites, and earned a revenue of $174 million and €256 million.

The ‘Make in India’ and ‘Atmanirbhar Bharat’ enhancing campaigns self-reliance, will get a boost. The government is likely to increase budgetary allocation towards the space sector. Indian Space Research Organization (ISRO) is turning towards domestic manufacturers like Larsen and Toubro (L&T) and Bharat Heavy Electricals, to provide vital supplies for its projects. The stock prices of 13 companies that supplied materials for the mission surged.

The space sector was thrown open to private companies in 2020. There are currently 400 companies, including 140 space tech startups. Skyroot became the first private company to launch a rocket in India and South Asia. In August 2023, government extended the Goods and Services Tax (GST) exemption for private companies that launch rockets in India.

The first Chandrayaan mission inspired me to start my own Space company, says Sanjay Nekkanti, CEO & co-founder, Dhruva Space. “I see the impact bolstering space business in India; there are many opportunities to meet the growing demand customers have to not just launch one satellite, but a constellation of satellites at once.”

India’s global space economy, was valued at $9.6 billion with a share of 2%-3% in 2020. It is expected to reach $13 billion by 2025, 10% by 2030.

When India’s largest mortgage lender, Housing Development Finance Corporation (HDFC), merged with its subsidiary HDFC Bank on July 1, it became the largest in India’s corporate history. The $40 billion all-stock merger resulted in the creation of the fourth-largest bank in the world. Only JPMorgan Chase, the Industrial and Commercial Bank of China and Bank of America remain larger.

The resulting institution also is the most valuable Indian company, with an approximately $157 billion market capitalization, beating out Reliance Industries and the State Bank of India, India’s second-largest bank. HDFC Bank has $390 billion in assets, more than double the size of ICICI Bank ($190 billion) but smaller than SBI ($670 billion). The capital will enable the bank to deliver big-ticket loans for infrastructure and growth of the country while posing a challenge to the dominance of 12 public sector banks.

As part of the reverse merger, it will strip the bank of its promoter and the parent company, HDFC Ltd. But the merger’s synergies include an extensive distribution network, which will enable the cross-selling of everything from insurance to mutual funds to the 70% of HDFC customers who do not have accounts with the HDFC Bank. It will also provide mortgages for 93% of the 71 million customers of HDFC Bank who haven’t opened a mortgage account.

Another incentive for the merger is that merger costs have been reduced: The reserve ratios of banks declined from 27% to 22.5%, the interest rates have spreads on reserves, acceptance of priority sector lending (PSL) certificates and long-tenor affordable housing bonds are exempt from reserve ratios and PSL.

Sanctions stemming from the Ukranian conflict are meant to prevent Russian banks from using the Society for Worldwide Interbank Financial Telecommunication (Swift) platform. Yet Indian companies have found a workaround to settle non-dollar payments with Russia.

Russia is ranked second, after the US, in the number of Swift users. The banking cooperative has more than 11,000 member institutions in over 200 countries. The sanctions crippled the financial lifeline for Russian companies that do cross-border transactions.

Subsequently, Russia incentivized bilateral trade with friendly countries by offering deep discounts for Russian crude and accepting trade settlements in national currencies.

Just a fraction of the trade is in dollars, says Mrutyunjay Mahapatra, former CEO of Syndicate Bank. “The majority of Russian business is done through bilateral trade using the ruble and other currencies through its messaging system SPFS, an alternative to the Swift system.”

India has settled the trade in non-dollar currencies like rubles and dirhams and via third-party countries like Dubai. Recently, the UAE central bank approved Russian bank MTS, based in Moscow; and Abu Dhabi was put on the sanction list for processing Indian oil non-dollar payments.

Indian oil purchases from Russian state energy giants Gazprom and Rosneft were settled in rubles through the State Bank of India’s nostro account in Russia. Indian companies Reliance Industries and BPCL use dirhams to settle oil transactions. The Bank of Baroda and Axis Bank have processed the dirham payments. If the ruble transactions are blocked, the trade settlement will take place in Indian rupees.

India, the world’s third-largest importer of crude oil, took advantage of the discounted prices. Russia became the top exporter of crude oil to India for the first time in October 2022, eclipsing Iraq and Saudi Arabia.

According to the International Energy Agency, Russia accounted for nearly 40% of India’s crude oil exports in February 2023. India’s imports from Russia rose by five times from April 2022 to February 2023 to $41.6 billion from $8.5 billion, compared with the same period the previous year.

The largest digital payments platform, PhonePE India, raised $350 million in funding from global equity firm General Atlantic, at a pre-money valuation of $12 billion in January. As a startup with a valuation of over $1 billion, it will join India’s “decacorn” club, which includes Flipkart, Byju’s, Swiggy and Nykaa.

Walmart subsidiary Flipkart Group acquired PhonePE in 2016. It has since become a household name. PhonePE users can send and receive money, top-up mobiles and direct-to-home and pay household bills. Users traveling abroad, meanwhile, can pay foreign merchants using the instant real-time payment system Unified Payment Interface (UPI). More than 435 million consumers and merchants have used PhonePE’s digital platform, which means that more than one in four Indians are platform users. Additionally, more than 35 million offline merchants were digitized in Tiers-2, -3 and -4 cities, covering 99% of postal codes in the country.

PhonePE has the largest market share in the UPI space and is also the leader in the integrated bill-payment system Bharat Bill Pay System, processing more than 45% of the platform’s transactions. In 2017, PhonePE branched out into financial services like mutual funds, insurance products, 24-karat gold and silver, which grew to an aggregate 46% market share by December 2022, according to data from the National Payment Corporation of India. The company has the most trusted brand for digital payments in India, according to the Brand Trust Report 2022 by Trust Research Advisory.

After PhonePE’s separation from the parent company Flipkart and a domicile change to India from Singapore in 2022, Flipkart Singapore and PhonePE Singapore shareholders—led by Walmart, Qatar Investment Authority and Microsoft—have acquired shares in PhonePE directly. PhonePE also has set a target of raising $1 billion starting January 2023. Funding from General Atlantic marked the first tranche. The second tranche of $100 million came from Ribbit Capital, Tiger Global and TVS Capital.

Japan’s second-largest global bank, Sumitomo Mitsui Financial Group (SMFG), faces a $670 million capital gains tax bill from India on the bank’s nearly $2 billion acquisition of nonbanking financial company Fullerton India Credit. SMFG holds a 74.9% stake in Fullerton India; Fullerton Financial Holdings, a wholly owned company of Singapore-based Temasek, has the remaining 25.1% stake.

SMFG had kept aside $170 million for tax purposes for the deal completed in July 2021, marking a Japanese bank’s first entry into India’s retail finance business. The income tax authorities demanded an additional $500 million on behalf of the seller, which Sumitomo had not expected.

A 2012 decision by India’s supreme court categorically stated that the country’s income tax authorities are not authorized to tax capital gains that arise from the indirect transfer of shares of an Indian company that is majority-owned by a foreign  company, when the foreign parent is acquired by another foreign company.

The taxes forgone by the tax department were so huge that the 1961 Income Tax Act’s provisions were amended retroactive to 1962 by India’s Finance Act in 2012. This amendment struck at the core of the supreme court ruling and made Vodafone liable to taxation retroactively for an earlier deal.

India’s Bharatiya Janata Party-led government applied this amendment to raise tax demands on various companies, including Capricorn Energy and Vodafone. But the multiyear tax disputes with these multinational companies damaged the reputation of India as a business-friendly nation.

In 2021, to attract foreign investments and to position India as a business-friendly nation, the current National Democratic Alliance government brought a bill in the Lok Sabha (the lower house of India’s parliament) to scrap the retroactive taxes. However, the capital gains tax for deals done after 2012 remained, without any change, resulting in the capital gains tax bill of $670 million for SFMG.

As of now, it is not clear whether the Japanese bank will comply with or contest the taxation. If it does the latter, it will drag the government to another drawn-out tax dispute.

The Reserve Bank of India’s (RBI) digital currency, Central Bank Digital Currency Wholesale (CBDC-W) and Central Bank Digital Currency Retail (CBDC-R), went live on Nov. 1, 2022, and Dec. 1, 2022, respectively. The trial run for the CBDC-W, which is meant for interbank transfers, and the CBDC-R, which targets nonfinancial consumers, private sectors and businessmen, started in four cities and banks with a closed user group of participating customers and merchants.

The CBDC is a legal tender, guaranteed by the RBI, similar to paper currency, except that it cannot be seen and touched. It is available in all denominations of paper currency and coins and can be converted to paper currency or rupee bank accounts without a change in value. As it is a direct liability of the central bank, it provides risk-free payment and settlement finality.

It has a two-tier model similar to paper currency. The RBI will issue and redeem the eRupee, and the commercial banks will manage the distribution and payment services.

The collaborating banks will offer a digital wallet that customers can download on their laptops or phones, enabling them to use eRupee for online transactions. Even people from rural villages, without access to the internet, can transact using offline transactions. To transact in an eRupee, both the sender and receiver need a digital wallet. The customer can opt for person-to-person or person-to-merchant transactions and can deliver eRupee tokens using text messaging or QR codes.

RBI was prompted to issue the eRupee due to the adverse effects of cryptocurrency, the ever-increasing demand for currency notes, the promotion of the digital economy and financial inclusion, and the expenses for printing currencies ($600 million in the financial year 2021-2022).

Central banks in 19 countries have completed CBDC trials. The Bank of Japan is already collaborating with the top three banks and regional financial institutions to launch a digital yen pilot this spring. With countries moving toward the future interoperability of CBDCs, India, one of the biggest receivers of remittances from abroad—receiving $87 billion in 2021 alone—is determined to not be the odd one out.

Sanctioned Russian banks now have access to one of the world’s largest markets, due to a recent decision by the Indian government to permit cross-border trade settlements in rupees to promote Indian exports.

To settle trade deals under rupee trading, Indian banks have to open special rupee-vostro accounts in the trading partner country’s banks. The special rupee-vostro account is an account opened by a domestic bank to hold the holdings in rupees on behalf of a foreign bank.

The payment from the Indian importer is credited to a particular vostro account of the correspondent bank of the exporter’s country in India against the invoices for the supply of goods or services from the exporter. Similarly, an Indian exporter to a foreign country is paid the export proceeds in rupees from the balances in the designated special vostro account of the importer’s correspondent bank in India.

Although the exchange rate between the currencies of India and the foreign country is market-determined, all trade deals are denominated, invoiced and settled in rupees. Thus, it will bypass the Society for Worldwide Interbank Financial Telecommunications (Swift) messaging platform and other Western banking systems and allow India to trade with countries like Russia and Iran that face Western sanctions.

Recently, the Reserve Bank of India approved opening nine special rupee-vostro accounts of Russian banks with Indian banks, making Russia the first to open vostro accounts in India. India’s UCO Bank opened an account for Russia’s Gazprom Bank. Branch offices of VTB Bank and Sber Bank in India have opened accounts for their parent banks. IndusInd Bank will open the remaining six accounts.

Since the Ukraine war, India-Russia bilateral trade has soared to a record high, making Russia the seventh-largest trading partner for India. From April to August of 2022, Russian exports to India were worth $17.2 billion, while Indian exports to Russia accounted for a paltry $992 million, leaving a negative trade balance of $16.2 billion.

If rupee trading materializes, Russia will not be the only one to benefit. It will change the trade balance dramatically between India and Russia in India’s favor.