GS Paper-3
Syllabus: Effects of liberalisation on the economy (post-1991 changes)
Source: Live Mint
Context:
In order to facilitate trade with sanctions-hit Russia, RBI has allowed global trade settlements in Indian rupees for domestic traders. Banks will need RBI approval to use the new system.
Benefits:
- Will boost Indian export and currency: The move would promote global trade growth with an emphasis on exports from India (e.g. Tea export) and will support the increasing interest of the global trading community in the domestic currency.
- Expedite transactions with sanctions-hit Russia: India’s trade with Russia stood at $13.1 billion in 2021-22.
- Final settlement in Indian Rupee: Under the existing provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. Now, if RBI approves, the final settlement to all countries can be in the Indian rupee.
- Save foreign currency and reduce trade deficit: Since India imports more than it exports. It will enhance forex inflows and as a step to stabilize the rupee.
- Will help build better ties with Russia: The opening of the trade settlement route shows Russia’s importance as India’s trading partner in the face of increasing pressure from Western countries to cut links.
- Can be used for other neighbouring countries as well: Several countries including Iran, Sri Lanka and some in Africa and Latin America are facing forex shortages. As such, the new mechanism will help India promote its exports in these countries.
How the system will work:
- Russian banks will have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited.
- Indian importers will make payments in rupees, to be credited to the Vostro account of the correspondent bank of the partner country.
- Indian exporters will be paid the export proceeds in rupees from the balances in
Issues:
- A similar Vostro account set up for the purpose of trade with Iran had run dry as India was stopped from sourcing oil from Iran amid US sanctions.
- Exporters had said the payment problem in the Iran market restricted them from filling the space left vacant by Sri Lanka, which is in the middle of a severe financial crisis.
- Western countries might put pressure on India to not allow any such mechanism.
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Practice Questions
Q. Even as India and Russia explore new relationships, they continue to remain each other’s, all-weather friends. Comment. (10M)
Q. The problem of international liquidity is related to the non-availability of (UPSC 2015)
(a) goods and services
(b) gold and silver
(c) dollars and other hard currencies
(d) exportable surplus
Answer: C
Since most International transactions occur in Dollar or other hard currencies.
Q. The balance of payments of a country is a systematic record of (UPSC 2013)
(a) All import and export transactions of a country during a given period of time, normally a year
(b) Goods exported from a country during a year
(c) Economic transaction between the government of one country to another
(d) Capital movements from one country to another
Answer: A
In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world.
