RBI allows International Trade Settlement in Indian Rupees

On July 11th, 2022, the Reserve Bank of India announced a big decision by allowing trade settlements between India and other countries in Indian Rupees (INR). This measure is aimed at facilitating the growth of global trade with emphasis on export from India and to support the interests of the global trading community in Indian rupees. The decision to allow INR in international trade settlements is considered an important step to facilitate trade with Russia, Iran, and Sri Lanka. To accept payments in rupees, authorized dealer banks will have to open special Rupee Vostro accounts. The present article briefs the International Trade Settlement in Indian Rupees. For more details on Foreign Trade Policy, click here

The Gist of RBI Circular

The important announcement made via the RBI Circular dated International Trade Settlement on 11th July 2022 is listed as follows:

RBI has also placed an additional arrangement for invoicing, payment, and settlements of exports/imports in Indian rupees.
As mentioned above, the Circular further states that the exchange rate between currencies of two trading partner countries may be market determined and the entire process will be carried out using a special VOSTRO account.
It is also stated that the Rupee surplus balance accumulated in such account may be used for permissible capital and current account transactions in accordance with mutual agreement.

Why International trade Settlement in Rupees?

When countries import and export goods and services, they have to make payments in a foreign currency. Since the US Dollar is the world’s reserve currency, most of these transactions are entered into US dollars. If an Indian buyer enters into a transaction with a seller from Germany, the Indian buyer has to first convert his rupees into US dollars. The seller will receive those dollars which will then be converted into Euros. Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations This is where trade settlement in rupees comes in – instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.

Benefits of International Trade Settlement in Indian Rupees

As mentioned above, the decision to allow INR in international trade settlements is considered an important step to facilitate trade with Russia, Iran, and Sri Lanka
INR in international trade settlements is also expected to gradually contribute to the global acceptance of rupees for international trade transactions.
RBI is trying to make the Rupee globally acceptable for trade by letting settlements happen in Indian currency, instead of US dollars.

VOSTRO Accounts for International Trade Settlement in Indian Rupees

RBI said that for settlement of trade transactions with any country, the authorized dealer (AD) bank in India may open Special Rupee VOSTRO Accounts of correspondent bank/s of the partner trading country. A Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India. Foreign parties will be able to send and receive money from Indian exporters and importers via these Rupee Vostro accounts.

Framework for cross-border trade transactions in INR

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 the RBI circular dated 11th July 2022

Guidelines to Settle Trade Transactions in INR

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 the opening of a 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.
Indian traders undertaking imports via this mechanism shall make payments in rupees which shall be credited into the Special Vostro account of the correspondent bank of the partner country.
Indian exporters shipping goods and services under this mechanism shall be paid export proceeds in rupees from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

Documents Required

The export/import undertaken and settled in INR transactions manner shall be subject to usual documentation and reporting requirements. Letter of Credit (LC) and other trade-related documentation may be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms.

Advance against Exports

With regard to the advance against export, the RBI clarified that Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism. RBI advised that before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline.

Bank Guarantee

Issue of Bank Guarantee for trade transactions is permitted subject to adherence to provisions of the Foreign Exchange Management Act (FEMA).

Use of Surplus Balance

The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in Special Vostro Accounts can be used for the following:

Payments for projects and investments.
Export/Import advance flow management
Investment in Government Treasury Bills, Government securities, etc. in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provisions.

Import Export Code (IEC)

The Importer-Exporter Code (IEC) is a key business identification number that is mandatory for Exports or Imports. No person shall make any import or export except under an IEC Number granted by the DGFT. In the case of import or export of services or technology, the IEC shall be required only when the service or technology provider is taking benefits under the Foreign Trade Policy or is dealing with specified services or technologies. You can apply for an Import Export code through IndiaFilings and obtain it within 6 to 7 days.