Global Trade Local Currency | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Introduction

• The Reserve Bank of India has proposed a plan that will allow traders in the nation to settle import and export transactions in rupees. This action aims to encourage the growing interest of the international trading community in the Indian Rupee as well as the growth of global commerce with a focus on exports from India. 
• Additionally, this will make commerce with sanctioned nations like Russia easier. For receipts and payments in rupees, exporters and importers can use a special vostro account connected to the correspondent bank of the partner nation. India imports more than it exports, thus the new arrangement will allow it to save money on foreign exchange.

Current model

• If a company exports or imports, transactions are always in a foreign currency (excluding with countries like Nepal and Bhutan).
• In case of imports, the Indian company has to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.).
• The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its needs, in most of the cases.

RBI’s arrangement

• The RBI has decided to implement a new arrangement for exports and imports to be invoiced, paid for, and settled in INR in order to assist the expansion of international commerce with a focus on exports from India and to support the growing interest of the international trading community in INR.
• The Reserve Bank of India's Foreign Exchange Department must give its prior approval before AD banks may implement this procedure.
• The RBI's move has been praised as progressive because it would increase the Indian rupee's worldwide tradeability and reduce reliance on the US dollar, according to analysts.
• The broad framework for cross border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA) is as delineated below:
  • Invoicing:All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).
  • Exchange Rate:Exchange rate between the currencies of the two trading partner countries may be market determined.
  • Settlement:The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down.
• In terms of Foreign Exchange Management (Deposit) Regulations, 2016, 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 of the partner trading country.
• 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 supplier.
• 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.
• Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism.

Benefits of the new model

• It will promote growth of global trade and will support the increasing interest of the global trading community in INR.
• Ever since sanctions were imposed on Russia, trade has been virtually at standstill with the country due to payment problems. As a result of the trade-facilitation mechanism introduced by the RBI, will see payment issues with Russia easing.
• The move would promote global trade growth with an emphasis on exports from India (e.g. Tea export) and will support the increasing interest of the global trading community in the domestic currency.
• Under the existing provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. Now, if RBI approves, the final settlement to all countries can be in the Indian rupee.
• Since India imports more than it exports. It will enhance forex inflows and as a step to stabilize the rupee.
• The opening of the trade settlement route shows Russia’s importance as India’s trading partner in the face of increasing pressure from Western countries to cut links.
• Several countries including Iran, Sri Lanka and some in Africa and Latin America are facing forex  shortages. As such, the new mechanism will help India promote its exports in these countries.