Rupee trade settlement could prove to be a historic step
Ritesh Victor, Co-Founder & Country Head – Market Risk Advisory & TPO, Myforexeye Fintech Pvt Ltd, believes that for any country eager to trade with India and looking for easy trade settlements, the new system will allow a comfortable mechanism using the Indian Rupee.
The Reserve Bank of India, in a circular dated July 11, 2022, set up a system for settlement, invoicing and payment of exports and imports in the Indian Rupee. Until now, for all international trades, the settlements, invoicing and payments were done in the respective foreign currencies (US dollar, euro, British pound, Australian dollar, Canadian dollar, Singapore dollar, etc). Henceforth, such international trade transactions can be traded and settled in the Indian Rupees as well.
The framework of FEMA, 1999 Act has been modified to permit AD (authorized dealer) banks in India to open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country. Such accounts can be used for the settlements of international trade transactions with any country. Prior to setting up of the rupee settlement mechanism, the AD bank shall require an approval from the Foreign Exchange Department of the Reserve Bank of India, Central Office at Mumbai.
Broad features of such an international trade mechanism are outlined below:
- Invoicing of goods and services: any export or import under this plan may be invoiced and denominated in the Indian Rupee (INR).
- Exchange Rate fixing: price discovery of the exchange rate between the currencies of the two trading partner countries may be market determined.
- Settlement currency: The settlement of international trade transactions under this arrangement shall take place in Indian Rupees (INR).
Indian exporters, who want to use the rupee settlement mechanism for undertaking exports of goods and services, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
Similarly, Indian importers undertaking import of goods and services through this mechanism shall make their payments in INR, 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.
International trade transactions undertaken and settled under these guidelines shall be subjected to the standard documentation and reporting requirements. The overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) will be the guiding principles for issuance of Letter of Credit (LC) and any other trade related documentation, and it may be decided mutually between banks of the partner trading countries. Such banks of partner countries may also mutually agree for exchange of messages in a safe, secure and efficient manner.
Through the international trade settlement in Rupee system, Indian exporters may receive advance payment against exports from overseas importers in Indian rupees. Indian Banks, prior to allowing any such receipt of advance payment against exports, shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments. This shall be in compliance with the conditions mentioned on ‘Receipt of advance against exports’ under Master Direction on Export of Goods and Services, 2016. The Indian bank maintaining the Special Vostro account of its correspondent bank shall, in addition to its usual due diligence measures, verify the claim of the Indian exporter with the advice received from the correspondent bank before releasing the advance payment. The Indian Bank shall also ensure that advance is released only as per the instructions of the overseas importer.
Under the new rupee payment mechanism, ‘set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with facility to make/receive payment of the balance of export receivables/import payables, if any, will be permissible, subject to the existing conditions mentioned in ‘Set-off of export receivables against import payables’ under Master Direction on Export of Goods and Services, 2016.
Issue of Bank Guarantees for international trade transactions, undertaken through the new arrangement, is permitted subject to the compliance of the provisions of FEMA Notification of Master Direction on Guarantees & Co-acceptances.
In the Rupee Special Vostro account, any available surplus balance may be used for acceptable current and capital account transactions, with mutual agreement. Available balances in such accounts can be utilized for the following purposes:
- Payments for permissible investments
- Payments for projects
- Export/Import advance flow management
- Investment in Government Treasury Bills, Government securities, etc.
Reporting of international trade and cross border transactions under the new arrangement need to be done as per the guidelines of FEMA 1999.
An AD bank in India maybe approached by any bank of a partner country for opening of a Special Rupee (INR) VOSTRO account. The Indian AD bank will seek an approval from the Central Bank (RBI) with details of the arrangement. Indian AD bank maintaining the special Vostro Account shall comply with all the due diligence processes and ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures.
The Reserve Bank of India permitting Rupee settlements for international trade (exports and imports) is a huge step in internationalizing the Indian currency. There may not be immediate apparent benefits, except of course crude for oil trades with Russia and Iran. Nevertheless long-term advantages could be massive and far reaching.
For any country that wants to trade with India and looks for easy trade settlements, the new system will allow a comfortable mechanism using the Indian Rupee, instead of using any other foreign currency. The Indian banking system will allow and honour such international trades. The challenges will be more for the overseas exporter/ importer, who will need to look for efficient systems to convert Indian Rupee to their domestic currency and settle it, as well as hedge his domestic currency vs Indian Rupee volatility risk. It will also be a challenging task for Indian exporters/importers in convincing their overseas counterparts to accept the Indian Rupee as a currency of trade, invoicing and settlement.
Not only is this a colossal step in making the Indian Rupee a more acceptable currency worldwide, it is a considerable leap towards capital account convertibility. Probably a harbinger of goods things for India, history is made.
Ritesh Victor is Co-Founder & Country Head – Market Risk Advisory & TPO- Myforexeye Fintech Pvt Ltd. Views expressed are personal.