Introduction:
The Reserve Bank of India has announced an arrangement for the country’s traders to settle imports and exports in rupees. This move is aimed at promoting growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in Indian Rupee. This will also facilitate trade with countries like Russia which are facing sanctions. Under this mechanism, exporters and importers can use a special vostro account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees. India imports more than it exports so the country will also save foreign currency under the new arrangement.
Current model:
- If a company exports or imports, transactions are always in a foreign currency (excluding with countries like Nepal and Bhutan).
- In case of imports, the Indian company has to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.).
- The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its needs, in most of the cases.
- In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, RBI has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.
- Before putting in place this mechanism, AD banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India.
- The RBI’s move, which analysts say would make the Indian currency more tradable globally and lessen dependence on US dollar, has been hailed as progressive.
- The broad framework for cross border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA) is as delineated below:
- Invoicing:All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).
- Exchange Rate:Exchange rate between the currencies of the two trading partner countries may be market determined.
- Settlement:The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down.
- In terms of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts.
- Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank of the partner trading country.
- Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas supplier.
- Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
- Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism.
Benefits of the new model:
- It will promote growth of global trade and will support the increasing interest of the global trading community in INR.
- Ever since sanctions were imposed on Russia, trade has been virtually at standstill with the country due to payment problems. As a result of the trade-facilitation mechanism introduced by the RBI, will see payment issues with Russia easing.
- 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.
- 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.
- Since India imports more than it exports. It will enhance forex inflows and as a step to stabilize the rupee.
- 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.
- 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.
