RBI Pushes For Adoption Of Rupee For International Transactions

Under a new mechanism, a foreign party is required to open a special rupee Vostro account with an authorised dealer in India

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The Reserve Bank of India (RBI) has unveiled a mechanism to settle cross-border trade transactions in Indian Rupees (INR). Under the new international trade settlement norms, invoicing, payment and settlement of exports/imports can take place in INR by using a special rupee Vostro account if parties decide to do so. Until now, all international trades were being done in respective foreign currencies mostly in US dollars.

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Due to the outbreak of war between Russia and Ukraine, the US, the United Kingdom, and the European Union (EU) have banned Russia from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a globally secure interbank system. This brought several trade challenges and payment disruptions for India as well as for other countriesthat are dealing with Russia. This offered an opportunity for India to set up a parallel trade settlement mechanism in local currency with sanctioned hit countries. It is in this background that this new framework has been introduced by RBI. Although, this background does not find a reference in RBI's circular.

System of International Trade Settlement in Indian Rupees Mechanism

Under the new mechanism, a foreign party is required to open a special rupee Vostro account with an authorised dealer in India. Before opening a special rupee Vostro account, the authorized dealer banks will have to obtain prior approval from the foreign exchange department of RBI with details of the arrangement. This will enable RBI to keep a tab on all such trade settlements. Post receipt of the RBI approval, the parties that intend to opt for this mechanism can do settlement in INR, i.e., they will be able to raise/receive invoices in INR.

In the case of an Indian importer, they will have to make payment to the special rupee Vostro account of the overseas seller/supplier towards the invoices raised by the foreign exporter in connection to the supply of goods/services received/availed by the Indian importer. Indian exporters, on the other hand, will get paid from the balance of the special rupee Vostro accountof the corresponding foreign importer.The exchange rate between the currencies of Indian and other trading partner countries will be market determined.

The key features of the new international trade settlement are set out below:

No Additional Documentation and Reporting: Transactions under this mechanism shall be subject to usual documentation and reporting requirements and shall be under the ambit of the Uniform Customs and Practice for Documentary Credits and Incoterms.

Advance against the Export Permitted: Indian exporters will be permitted to receive an advance against the exports from the overseas importer. Before the receipt of any such advance money, the funds kept in the special rupee Vostro account will be first utilized for the payment of any export payment, if any. However, such advance shall be subject to the verification of claim by the authorized dealer bank and compliance with the RBI Master Direction on Export of Goods and Services, 2016.

Can do Setting off: Set off is allowed for the export receivables against the import payables for the same foreignbuyer/ supplier subject to the fulfilment of the terms andconditions set out in the RBI Master Direction on Export of Goods and Services, 2016.

Bank Guarantee: Trade transactionsinvolving bank guarantees are also permitted subject to the adherence toprovisions of Foreign Exchange Management (Guarantees) Regulations, 2005 and Master Circular on Guarantees and Co-acceptances.

Utilisation of Surplus: Surplus accumulated in a special rupee Vostro account can be utilizedfor permissible capital and current account transactions in accordance with Foreign Exchange Management Act and the regulations framed thereunder. In addition, the surplus can be invested in government treasury bills, government securities, etc.

Exclusion: An Indian exporter/importer dealing with a foreign party belonging to FATF Public Statement on High Risk and Non-Co-operative Jurisdictions will not be able to opt for this mechanism.

RBI's strategic move towards internationalization of INR and bypassing the SWIFT interbank system and establishing an alternate arrangement around the globe will help the Indian economy in terms of reducing the dependency on US dollars and would facilitate trade with countries under sanctions. This will certainly save India's outflow of the foreign reserve and may also help in making INR a globally accepted currency in long run.It will also ease the pressure on the exchange rate.

The benefits of the said move may not be seen in the short-term considering India's wide current account trade deficit. However, it will be beneficial in long run.It is one of the other measures opted by the government and RBI to monitor the outflow of dollars from India and boost the foreign inflows of foreign funds and prevent further depreciation of INR. Considering Indian trade with Russia, if the Russian importer/exporter participates under this new mechanism, Indo-Russian trade may be able to evade sanctions and bypass the SWIFT system thereby smoothening the trade between them.