Banks will need RBI’s approval from the RBI’s foreign exchange department to use the new system
The Reserve Bank of India‘s (RBI) latest decision to allow rupee transactions in international trade will help in subsiding price pressures and strengthen India’s presence in the global market. Here’re the decisions the central bank has taken regarding the rupee settlement system for international trade and its significance:
What Are the RBI’s Decisions?
The RBI has put in place an arrangement for invoicing, payment, and settlement of exports/ imports, allowing invoicing and payments for international trade in the rupee.
The central bank said that in invoicing, all exports and imports under this arrangement may be denominated and invoiced in rupee. The exchange rate between the currencies of the two trading partner countries will be market determined, and the settlement of trade transactions under this arrangement shall take place in rupee.
It added that for settlement of trade transactions with any country, authorised dealer banks in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
The banks will need RBI’s approval from the RBI’s foreign exchange department to use the new system.
What Is A Vostro Account?
A vostro account is an account a bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart, according to Investopedia.
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According to the RBI’s latest decisions, “Indian importers undertaking imports through this mechanism shall make payment in rupee which will 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.”
It added that Indian exporters, undertaking exports of goods and services through this mechanism, will also be paid the export proceeds in rupee from the balances in the designated special vostro account of the correspondent bank of the partner country.
What Will Be The Impact of The RBI’s Latest Steps?
The central bank said that 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 the rupee.
It will potentially facilitate greater bilateral business with Russia, which is facing Western sanctions and is virtually cut off from standard cross-border payment platforms.
“The RBI decision to allow rupee transactions in International trade will help to subside price pressures and strengthen India’s presence in the international market,” said Pradeep Multani, president of PHDCCI. He added that the rupee transactions will enhance trade with better give and take with its trade partners. India as a strong economy is an attractive destination for many economies for trade and investments.
“Internationalisation of the rupee will explore better complementarities with countries who are willing to enhance the trade trajectory with India,” said Multani.
Experts also say the RBI’s move may help narrow the country’s trade deficit as India can now increase the share of Russian oil purchases at a discounted price.
