New Delhi: reserve Bank of India (RBI) this week introduced a new mechanism for international trade settlement in rupee, aimed at boosting exports and facilitating imports.
In addition to promoting international use of the local currency, many exporters and economists see the measure as a way to boost trade with countries that are subject to Western sanctions such as Russia and Iran. read more
Moscow is discussing ways to remove the dollar and euro from commercial transactions with India, Iran, Egypt and some other countries.
Following are the key facts about India’s plans for settling international trade in Rupee.
How will the system work?
To settle international business transactions in rupees, a foreign bank must open a Vostro account with an authorized Indian bank – an account maintained by a correspondent bank on behalf of another bank.
Banks would need prior approval from the Reserve Bank of India to function as liaison banks.
Importers of goods or commodities like oil or coal will pay in these accounts in rupees. The accounts could then be used to make payments to Indian exporters in the local currency.
RBI said the surplus from Vostro accounts can be used to invest in government bonds and pay for projects and investments.
Which countries can use the new model?
Exporters’ bodies said the RBI’s move would help support trade with countries under sanctions, mainly Russia and Iran, and African and South American countries – and with neighboring Sri Lanka – that have little access to hard currencies. have access.
However, the RBI has not clearly named the countries for which the new mechanism can be used.
Exporters have been lobbying the Indian government to set up such an arrangement on the lines of an earlier system introduced in 2012 to trade with Iran after the United States and other Western countries imposed financial sanctions.
exchange rate
The exchange rate between the Indian currency and the trading partners would be market-determined, and the settlement would be in rupees.
Banks will be allowed to provide letters of credit, bank guarantees and offer advance payments to exporters for business transactions.
current mode of payment
Currently, international transactions are mostly settled in foreign currencies, such as the US dollar, British pound, euro or yen. Payment in Rupee is allowed only for some neighboring countries like Nepal and Bhutan.
Indian companies usually pay for imports in foreign currencies, while exporters get paid in foreign currency and in most cases converted into rupees.
Impact on trade with approved countries
Traders have welcomed the new mechanism, which they expect will increase engineering, pharmaceutical and food exports to Russia and some other countries by at least a few billion dollars this year, while crude imports will be cheaper.
Some commodity traders said they are in touch with buyers in Russia, and expect to use the mechanism in the coming days.
India’s exports to Iran nearly doubled in 2012 after a mechanism to partially settle the trade in rupees, while getting oil supplies at a discounted price.
What are the benefits for India?
Analysts said the RBI move could narrow India’s widening trade deficit by lowering the price of commodity imports, given that crude imports from Russia have increased in recent months.
But government officials said India would proceed with caution on internationalizing the local currency, given the associated risks to the economy, such as global shocks, asset bubbles and exchange rate volatility.
In addition to promoting international use of the local currency, many exporters and economists see the measure as a way to boost trade with countries that are subject to Western sanctions such as Russia and Iran. read more
Moscow is discussing ways to remove the dollar and euro from commercial transactions with India, Iran, Egypt and some other countries.
Following are the key facts about India’s plans for settling international trade in Rupee.
How will the system work?
To settle international business transactions in rupees, a foreign bank must open a Vostro account with an authorized Indian bank – an account maintained by a correspondent bank on behalf of another bank.
Banks would need prior approval from the Reserve Bank of India to function as liaison banks.
Importers of goods or commodities like oil or coal will pay in these accounts in rupees. The accounts could then be used to make payments to Indian exporters in the local currency.
RBI said the surplus from Vostro accounts can be used to invest in government bonds and pay for projects and investments.
Which countries can use the new model?
Exporters’ bodies said the RBI’s move would help support trade with countries under sanctions, mainly Russia and Iran, and African and South American countries – and with neighboring Sri Lanka – that have little access to hard currencies. have access.
However, the RBI has not clearly named the countries for which the new mechanism can be used.
Exporters have been lobbying the Indian government to set up such an arrangement on the lines of an earlier system introduced in 2012 to trade with Iran after the United States and other Western countries imposed financial sanctions.
exchange rate
The exchange rate between the Indian currency and the trading partners would be market-determined, and the settlement would be in rupees.
Banks will be allowed to provide letters of credit, bank guarantees and offer advance payments to exporters for business transactions.
current mode of payment
Currently, international transactions are mostly settled in foreign currencies, such as the US dollar, British pound, euro or yen. Payment in Rupee is allowed only for some neighboring countries like Nepal and Bhutan.
Indian companies usually pay for imports in foreign currencies, while exporters get paid in foreign currency and in most cases converted into rupees.
Impact on trade with approved countries
Traders have welcomed the new mechanism, which they expect will increase engineering, pharmaceutical and food exports to Russia and some other countries by at least a few billion dollars this year, while crude imports will be cheaper.
Some commodity traders said they are in touch with buyers in Russia, and expect to use the mechanism in the coming days.
India’s exports to Iran nearly doubled in 2012 after a mechanism to partially settle the trade in rupees, while getting oil supplies at a discounted price.
What are the benefits for India?
Analysts said the RBI move could narrow India’s widening trade deficit by lowering the price of commodity imports, given that crude imports from Russia have increased in recent months.
But government officials said India would proceed with caution on internationalizing the local currency, given the associated risks to the economy, such as global shocks, asset bubbles and exchange rate volatility.