Reserve Bank of India (RBI) Announces Mechanism for Rupee Based International Trade Settlement

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The Reserve Bank requested banks to make additional provisions for export and import operations in Indian rupees on Monday in light of the growing interest in the local currency among the world’s traders.

Banks will need prior approval from the Reserve Bank of India’s (RBI) Foreign Exchange Department before using this method, the central bank stated in a circular.

According to the statement, “it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR 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 INR.”

According to current FEMA requirements, the ultimate settlement must be made in free foreign exchange with the exception of Nepal and Bhutan, according to the top exporters’ organisation Federation of Indian Export Organisations (FIEO).

According to A Sakthivel, President of FIEO, “Now the final payment to all countries, if permitted by RBI, can be in Indian rupee.”

Additionally, he stated that the RBI’s action will open the door to trading and settlement of export-import (exim) transactions in the Indian rupee.

The decision to permit exim transactions using letters of credit will aid exporters and importers at a time when many countries in Africa and South America are experiencing severe cash shortages, he noted.

“This action acknowledges the Indian rupee’s status as a global reserve currency. The benefits on such exports in Rupee, which up to now have only been provided for export payments received in foreign currency, are something we hope the government would explain “said Sakthivel.

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According to the RBI, the relevant banks will need Special Rupee Vostro Accounts of Correspondent Bank(s) of the Partner Trading Country to settle trade transactions.

The statement read, “Indian importers who use this mechanism for imports should make payment 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.”

The funds in the designated Special Vostro account will be used to pay exporters who use this system to send products and services overseas in Indian rupees.

Through this arrangement, Indian exporters might be able to get rupee-based advance payments from foreign importers against their products.

The circular states that the maintained rupee surplus balance may be applied to mutually agreed-upon authorised capital and current account operations.

The remaining funds in special vostro accounts can be used to fund investments, manage export/import advance flows, and purchase government bonds.

The RBI stated that the directives would take effect right away.

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