India formalises rupee payment for foreign trade
Will not only allow major imports like oil from countries facing sanctions, but also reduce payment complications and dependence on USD
The Reserve Bank of India (RBI) has allowed formal invoicing, payment, and settlement of exports/imports in INR with immediate effect — a move that would safeguard India’s imports (mainly oil) and also boost exports.
The RBI said, “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.”
Countries like China have already stated openly their aim to curtail dependence on the USD. But their aim has been to belittle the US. India has gone ahead with the step without irking the US, while at the same time buttressing the INR.
India’s foreign trade could be impacted in several ways due to this move by the RBI. First, Indian imports will not depend much on the USD, which means India can import oil freely from countries like Iran and Russia, even when these countries face sanctions.
Second, there would be no need for a “special currency swap” arrangement with major trading partners of India. Countries that would like to export to India would just have to deal with the INR. The RBI importantly said, “The exchange rate between the currencies of the two trading partner countries may be market determined.” This makes the deal fair and not lopsided like with China.
Third, exporters from India could not bypass several steps – of buying USD, watching its movement vs INR, etc. In the long term, after the switch is complete, exporters will have an easier time and more exporters are likely to join. This should bolster the INR significantly in the long term and more importantly secure India’s foreign trade.
The RBI has also set measures to prevent misuse or misunderstanding of the switch to INR. It requires AD (authorised dealer) banks to seek prior approval from the Foreign Exchange Department of RBI. AD banks in India have been permitted to open Rupee Vostro Accounts, and could now open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
Letter of Credit (LC) and other trade related documentation may be decided mutually between banks of the partner trading countries, the RBI said.
Indian exporters can also receive advance payment against exports from overseas importers in INR. “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, through the Rupee Payment Mechanism may be allowed, subject to the conditions. Issue of Bank Guarantee for trade transactions is also permitted. The INR surplus balance held could be used for permissible capital and current account transactions.
The balance in Special Vostro Accounts could be used for payments for projects and investments, export/import advance flow management, and importantly in investment in Government Treasury Bills, Government securities, etc.
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