Sansad TV: Global Trade Local Currency | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Introduction

• The Reserve Bank of India (RBI) has unveiled a new arrangement for settling imports and exports in Indian rupees, which aims to promote global trade growth, with a particular focus on India's exports. The initiative also aims to cater to the rising demand for the Indian rupee by the global trading community, while facilitating trade with countries that are under sanctions, such as Russia.
• Under the new mechanism, exporters and importers can use a special vostro account, linked to the correspondent bank of the partner country, for all receipts and payments denominated in rupees. This move is expected to help India save foreign currency, given that the country imports more than it exports.

Current Practice:

Typically, transactions involving imports and exports are conducted in foreign currency, except with countries such as Nepal and Bhutan. In the case of imports, Indian companies have to pay in a foreign currency, mostly in US dollars, but could also include other currencies like pounds, euro, yen, etc. Conversely, in the case of exports, Indian companies receive payments in foreign currency, which they usually convert to rupees, as they need the local currency for their operations.

RBI’s arrangement

• The Reserve Bank of India has introduced a new arrangement for settling imports and exports in Indian Rupees to promote growth in global trade with an emphasis on exports from India. Prior approval from the Foreign Exchange Department of RBI is necessary for AD banks before implementing this mechanism. The move has been viewed as progressive and will make the Indian currency more tradable globally, reducing dependence on the US dollar. 
• Under this arrangement, all exports and imports can be invoiced and denominated in INR, and the exchange rate can be market determined. Settlement of trade transactions will take place in INR in accordance with the laid-down procedure. Indian importers and exporters can use a special Rupee Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees. Indian exporters may receive advance payment in Indian rupees against exports from overseas importers through this Rupee Payment Mechanism.

Benefits of the new model

• The new trade-facilitation mechanism introduced by the Reserve Bank of India (RBI) will not only promote the growth of global trade, but also support the increasing interest of the global trading community in the Indian Rupee (INR). One of the countries that will benefit from this mechanism is Russia, which has been facing payment problems due to sanctions imposed on them. By allowing final settlements to be in the INR, it will ease payment issues with Russia and stabilize the rupee, as India imports more than it exports.
• The current provisions of the Foreign Exchange Management Act state that final settlements must be in free foreign exchange, excluding Nepal and Bhutan. However, with RBI's approval, all countries can now settle their imports and exports in INR. This will enhance forex inflows and help promote Indian exports in countries facing forex shortages such as Iran, Sri Lanka, and some in Africa and Latin America.
• Opening this trade settlement route with Russia also highlights their importance as India's trading partner, especially in the face of increasing pressure from Western countries to cut links. Additionally, the new mechanism will support the growth of global trade with a focus on India's exports, such as tea exports.