A notification from the RBI has announced that India now allows international trade settlement in Rupee with Russia, Sri Lanka, and other nations.
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The Reserve Bank of India (RBI) has permitted rupee-based trade settlements between India and other nations, such as Russia and Sri Lanka.
“In order to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR,” the RBI said in a notification on Monday.
Before engaging in such transactions, banks must obtain authorisation.
“(The) exchange rate between the currencies of the two trading partner countries may be market-determined,” the RBI said.
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“On first reading, this circular seems geared towards enabling rouble-rupee trades settled in rupees,” Ananth Narayan, associate professor at the S P Jain Institute of Management and Research, told Business Standard. “The language also seems to envisage alternative financial messaging to SWIFT (Society for Worldwide Interbank Financial Telecommunications), if so needed.”
Vostro accounts may be opened in rupees by banks in India (Vostro accounts are arrangements between banks across geographies). The RBI stated that banks in India may open special rupee Vostro accounts of correspondent bank(s) of the partner-country in trading for the purpose of settling trade transactions with any 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 seller/supplier,” the RBI said.
The notification stated that payments made to Indian exporters of goods and services via this method should be made in rupees from the assets in the authorized special Vostro account of the correspondent bank of the partner nation.
“At first glance, the move clearly looks like it is aimed at facilitating easier trade with Sri Lanka. The step to bring about denomination in rupees (for invoicing of exports and imports) definitely suggests that it is aimed at other countries in our neighbourhood so as to remove the dollar exchange rate risk. There is also the element of facilitating trade with Russia, which is also a factor,” a senior economist with a large bank said.
- All exports, imports may be denominated, invoiced in rupees
- Exchange rate between currencies of two trading countries may be market-determined
- Settlement of trade transactions under this arrangement will take place in rupees
- Rupee surplus balance may be used for capital and current account transactions
- Balance in Special Vostro Accounts can be invested in govt securities
India was Sri Lanka’s second-largest trading partner in 2020, with bilateral merchandise trade totaling over $3.6 billion, according to the Sri Lankan High Commission.
“The rupee has not weakened against every currency. In fact, it has strengthened against the currencies of most major countries. It seems like it is aimed at curbing that currency volatility. In principle, this is a good step because it gives more flexibility to both importers and exporters,” said Rahul Bajoria, managing director and chief India economist, Barclays.
The RBI has stated that using this arrangement, Indian exporters may obtain an advance payment in rupees.
“Before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders / export payments in the pipeline,” the notification said.
The RBI stated that its surplus balance might be used in accordance with bilateral agreements for capital and current account transactions. According to the central bank, the remaining funds in the special Vostro accounts can be used to fund investments and projects, manage export and import advance flows, and purchase government assets.