The Reserve Bank of India has announced new mechanism that will allow settlement of international trade in Indian rupee. This is a first time that it has done so. Why? There are multiple reasons.
Firstly, as the central bank said, it will help promote growth of global trade with emphasis on exports from India. It also said the move will support the increasing interest of global trading community in the Indian rupee.
Allowing trade settlement in rupee, could help India’s exporters as well as importers trade with certain countries like Russia, which has been barred from using a global currency like the US dollar following its invasion of Ukraine. Trade with India’s neighbours like Sri Lanka, which is amid a foreign exchange crisis, could also be easier.
More importantly, this is a crucial move in the backdrop of a sharp depreciation of the rupee against the dollar. Over the last few months amid massive pullout of foreign institutional investors from India, the rupee has been sliding towards the 80 mark. On Tuesday morning, the rupee touched 79.58 to the dollar. RBI’s latest move could help stabilise the rupee if only to some extent.
How will the mechanism work?
Before putting this mechanism in place, the authorised dealer banks will require prior approval from the foreign exchange department of RBI.
All exports and imports under this arrangement may be denominated and invoiced in rupee. Exchange rate between the currencies of the two trading partner countries may be market determined. The authorised dealer banks have been allowed to open rupee vostro accounts (an account that a correspondent bank holds on behalf of another bank).
“Indian importers undertaking imports through this mechanism 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 said.
Indian exporters may receive advance payment against exports from overseas importers in Indian rupee through the rupee payment mechanism as well.
Authorised dealer bank maintaining the special vostro account will have to ensure that the correspondent bank is not from a country or jurisdiction in the updated public statement of the financial action task force (FATF) on high risk and non co-operative jurisdictions on which FATF has called for counter measures, the RBI further said.
What do experts say?
Allowing trade settlement in rupee is a good move and a step towards making the rupee an international traded currency, says Abhishek Goenka, founder and CEO of IFA Global.
“This would make the rupee more tradable globally in offshore centers. The acceptance of the rupee will go up,” said Goenka.
Since the invoice will be in rupee, the foreign exchange risk will get transferred to the overseas buyer, he added.
Following the Russian war on Ukraine, many countries imposed sanctions on Russia, which included cutting its access to US dollar. Following this, many Indian companies trading with Russia and those looking to take advantage of discounted price of Russian oil and other commodities have had to look at payment alternatives.
RBI’s move to allow trade settlement in rupees will help in this regard. It could also facilitate wider trade with countries like Iran, which are under sanctions.
Economists at Motilal Oswal Financial Services say, it could help reduce the effectiveness of the US sanctions imposed on Russia.
The RBI’s move implies it is “aiming to de-dollarise global trade and the Indian economy,” the economists felt.
Deepak Shenoy, the founder of Capitalmind also wrote, “the internationalisation of the rupee gets a major kick.”
“It will help the rupee against the US dollar, because we don’t need so much dollar for our imports if Russia, Iran, UAE, Venezuela etc. were to trade with us in rupee. That will reduce the pressure on the exchange rate,” added Shenoy
However, it is likely to be a long-draw process, say the economists at Motilal Oswal.
“Implementation of this process will require extensive deliberations with trading partners. The success of this measure will depend on how many of them are willing to trade in rupee,” they said.
There is also a possibility that if India seeks import settlement in rupee, the trading partner could seek its import settlement in its local currency too. In such a scenario, the RBI may then have to hold foreign exchange reserve in a basket of currencies.
Shenoy of Capitalmind also pointed for the measure to really take effect, the rupee should truly be a “floating currency and tradeable worldwide.”
Indian rupee is only partially convertible (freedom to convert rupee into foreign currency at market rates). While, the rupee is fully convertible for current account transactions, trade settlement, for instance, there are certain restrictions for capital account transactions.
