RBI now permits cross-border rupee payments

12 Jul 2022 , 09:44 AM

On Monday (11-07-2022), the Reserve Bank of India (RBI) approved rupee invoicing and payments for foreign commerce, possibly allowing more bilateral trade with Russia, which is subject to a number of Western sanctions and is essentially blocked off from conventional cross-border payment systems.

According to the RBI, this is done to encourage the growing interest of the international trading community in INR as well as to promote “the expansion of global commerce with a focus on exports from India.”

The rupee has recently fallen to historical lows against the US dollar, which has increased the prospect of imported inflation in a nation that depends on foreign imports to cover about four-fifths of its annual motor-fuel consumption.

It is true that India’s growing trade imbalance has also contributed to this. According to traders, the central bank would be able to maintain its foreign-exchange stockpile with a higher rupee stake in international commerce.

Authorized banks will need prior clearance from the central bank to implement this method. According to Madan Sabnavis, chief economist of the Bank of Baroda, “the international trade settlement in rupees would offer a solution to such transactions with nations like Russia that are out of the SWIFT system.” “This will support international trade, particularly imports for India. The market’s selection of the exchange rate, however, will be the crucial factor”.

Banks in India are permitted to open Special Rupee Vostro Accounts of correspondent banks of the trading partner countries in order to settle trade transactions with any country.

The RBI will issue an operational circular to ensure cross-border trading employing the local monetary unit, ET first reported in its edition of June 19th.

According to a mutual agreement, the stored rupee excess balance may be utilized for legal capital and current account operations. The remaining balance in special Vostro accounts can be used to control the flow of funds for exports and imports, as well as to pay for projects and investments.

According to Joydeep Sen, a former foreign banker now headquartered in Mumbai, “international trade settlement in INR, be it with Russia or any other country, will be another frontier in our independence in foreign policy.” With reference to our foreign policy and trade, “India is correctly challenging the entrenched interests of the US and Europe.”

Additionally, at a time when foreign exchange reserves are under strain, such trading will escape the purview of currency movement and help India, according to a currency dealer.

Anindya Banerjee, the currency analyst at Kotak Securities, stated that the RBI’s action “may assist reduce the trade imbalance as New Delhi can now boost the percentage of Russian oil purchases at a lower price.”

When employing this system, Indian traders would pay bills for the provision of goods or services in rupees, which will be credited or debited into the specific Vostro accounts of the correspondent bank of the partner nation. According to the RBI, the remaining amount in the special Vostro accounts may be invested in treasury bills or used to pay for projects and investments.