New Delhi: Days after sanctions-hit Russia became the first overseas country to start foreign trade in Indian rupee, about 35 nations have expressed interest in better understanding the rupee trade mechanism.
The India’s central bank – Reserve Bank of India, or RBI – in July 2022 set up India’s rupee trade settlement mechanism to attract interest from more countries.
After Russia, dollar-strapped Sri Lanka is expected to use the Indian rupee trade settlement mechanism.
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Countries willing in rupee trade mechanism
Countries that are keen on rupee trade include neighbours such as Bangladesh, Nepal and Myanmar which have been grappling with a shortage of dollar reserves.
As per reports, Tajikistan, Cuba, Luxembourg and Sudan have also been talking to India about using the mechanism.
These four nations have shown interest in opening special rupee accounts called Vostro accounts and are waiting for partner banks in India to provide those facilities, a report by news agency Reuters had quoted two sources and an official document stating.
Meanwhile, Mauritius and Sri Lanka, who have also shown interest, have seen their special Vostro accounts approved by the RBI.
How trade settlement in rupee will help India?
Dealing and payments of most of imports, including crude oil, and several overseas transactions by India have to be paid in US dollar. The Asian nation has to sell INR (Indian Rupee) to buy USD to pay OPEC (Organization of the Petroleum Exporting Countries) for its oil imports.
Notably, INR is not fully convertible and therefore, it is often difficult to get buyers for it. On the other hand, USD has higher demand as compared to INR and its supply is controlled by the Fed.
With trade being done in rupees, RBI will not be required to find buyers for INR to sell USD in return. It, therefore, increases the demand for the Indian rupee and brings in savings that has been accumulated from not having to remit conversion charges to banks. The Indian government-led by Prime Minister Narendra Modi is exploring to do this with other nations.
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India rupee trade settlement
India’s rupee trade settlement mechanism is a method of using INR instead of dollars and other big currencies for international transactions.
For importing and exporting goods and services, countries have to make payments in a foreign currency. Since the USD is the world’s reserve currency, most of the transactions are settled in dollars.
For example, if a buyer in India enters into a transaction with a seller from Denmark, he/she first has to convert rupee into USD to make payment.
The seller, after receiving those dollars, will have to get the amount converted into euro. Both the parties involved will incur the conversion expenses and bear the risk of foreign exchange rate fluctuations.
India has been reportedly looking to bring countries that are short of dollars into the mechanism.
Over the last few months, a firm dollar has been weighing on imports for several countries around the world, thereby, creating an immediate need for an alternative.
With the help of a vostro account, instead of paying and receiving US dollars, the countries can get the invoice of the goods and services made in Indian rupees if the counterparty has a Rupee Vostro account.
When an Indian buyer wants to make transaction in rupees with a foreign trader, the amount will be credited to this Vostro account. When the Indian exporter needs to be paid for goods supplied, this Vostro account will be deducted, and the amount will be credited to the exporter’s account.
For example, a bank of Denmark may approach an AD bank in India for the opening of Special Rupee Vostro account. After which, the AD bank will seek approval from RBI with details of the arrangement and post the approval granted by the India’s central bank, the Special Rupee Vostro account in the Indian AD bank by a Denmark bank will get operational.
The trade settlement between the two parties can then start in INR. Also, the exchange rate between the currencies of the two trading nations may be market determined.
Key takeaway
For a currency to be termed ‘international’ it has to be widely accepted across the world as a medium of exchange for trade. As per the RBI, trade settlement in INR would reduce dependency on hard currencies including the US dollar, euro and yen.
