Explained: RBI has allowed trade in rupee; what this means for India

Update: 2022-07-12 08:55 GMT

The Reserve Bank of India (RBI) has introduced a new system to enable trade in rupees (INR) with an aim to facilitate dealings with countries under international sanctions, such as Iran and Russia.

Financial experts see this as a first step towards 100% convertibility of the rupee and an effort aimed at promoting global trade with focus on exports from India and to drum up support for ever-increasing interest of the global trading community in INR.

Also read: Rupee hits all-time low of 79.60 against US dollar, with 15 paise fall

As a first step, the RBI has provided an additional arrangement for invoicing, payment, and settlement of exports/imports in the rupee. However, banks, given the permission to act as authorised dealers, will need prior permission from the Foreign Exchange Department of RBI.

The need for a mechanism of International Trade Settlement was required since the Russia-Ukraine war began. The India-Russia trade has almost stopped due to payment issues.  The new system will ease the trade bottlenecks with Russia. Normally, we would have had to pay Russia in dollars for oil purchases. Now, the same payment can be done through the rupee-rouble route. Experts say the mechanism will also cut the risk of forex fluctuation.

Also read: Starbucks goes desi with masala chai, filter coffee on the menu

A representative of a private bank, quoted by a media report, said that Russian banks will now have to open Vostro accounts in India. In case of export or import, that account will be debited or credited, depending on the transaction.

The RBI stated that the new system will denominate all exports and imports and invoice them in rupee (INR). The exchange rate between the currencies of the two trading partner countries will be decided by the market. Additionally, AD banks will be allowed to open Rupee Vostro Accounts.

The settlement of trade transactions under this arrangement shall take place in Indian rupee, the apex bank stated.

Indian importers undertaking imports through this system shall make payment in rupee 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.

Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in rupee from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

The RBI has set the rules for advance against exports, setting of export receivables against import payables, bank guarantee, use of surplus balance in the Special Vostro Accounts etc.

Also read: It’s raining bonuses, increments for Wipro, Infosys, other IT staff

Need for clarification

President of Federation of Indian Export Organisations (FIEO) A Sakthivel said in a statement: “This move is a recognition of the Indian rupee as an international currency. We hope that the government will clarify on export benefits on such exports in rupee, which is hitherto only granted for export payments received in foreign currency.”

Madan Sabnavis, chief economist with the Bank of Baroda, termed it a good step for India. “Our country imports more and exports less in comparison. This move will help save foreign currency,” he said, as quoted by media reports.

Tags:    

Similar News