Explained: What RBI's Decision To Allow International Trade Settlements In Rupee Means

Earlier this week, the Reserve Bank of India announced a big decision by allowing trade settlements between India and other countries in rupees.

In its circular, the RBI mentioned that the move is taken 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 the Indian Rupee. This has prompted the RBI to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in rupee. This move is being expected to go a long way in promoting the rupee as a currency for trade settlement.

How will the model work?

To settle trade transactions with any country, RBI has laid out the guidelines in the circular.

The bank of a partner country (with which import/export has to be done) may approach the authorized dealer (AD) bank in India for opening of Special INR VOSTRO account. The AD bank will seek approval from the RBI with details of the arrangement to go forward. AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.

So, Indian importers undertaking imports through this mechanism shall 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.

And Indian exporters undertaking exports of goods and services through this mechanism 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.

How does the current system of payment work?

Prior to this new model¡¯s introduction by the RBI, if a company exported or imported, transactions were almost always in a foreign currency. So in the case of imports, the Indian company had to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.). And the Indian company got paid in foreign currency in case of exports and the company used to convert that foreign currency to rupee since it mostly needs rupee for its needs, a report in Indian Express mentioned.

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Also Read: Do You Know How The RBI Creates & Distributes Indian Rupee Banknotes?

Will this move help arrest the fall of the Indian rupee?

The report mentioned that this move will help the rupee to a ¡®very limited extent¡¯. The rupee, like almost all global currencies, has been depreciating and repeatedly hitting all-time lows, and the RBI has been using the country¡¯s foreign exchange reserves to control the fall of the rupee. But despite all the attempts, the Indian rupee hit a new record low of 79.83 against the dollar yesterday.

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