RBI nod to allow international trade settlements

Source: By Mihir Mishra: The Indian Express

The Reserve Bank of India on 11 July 2022 announced its decision to allow trade settlements between India and other countries in rupees. While the move is seen to benefit trading primarily with Russia, it is also likely to help check dollar outflow and slow rupee depreciation to a ‘very limited extent’.

To settle trade transactions with any country, banks in India will open Vostro accounts (an account that a correspondent bank holds on behalf of another bank — for example HSBC vostro account is held by SBI in India) of correspondent bank/s of the partner country for trading. Indian importers can pay for their imports in rupee into these accounts. These earnings (from imports) can then be used to pay Indian exporters in Indian rupee.

As of today, if a company exports or imports, transactions are always in a foreign currency (excluding with countries like Nepal and Bhutan). So 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.

Which countries are expected to use this new model?

While the RBI order has not overtly said so, this arrangement is likely to be used only for Russia.

“There are sanctions on Russia post the Ukraine war and the country is off the SWIFT system (system used by banks for payments in foreign currency). This means payments do not have to be made in foreign currency and this arrangement would help both Russia and India,” said Madan Sabnavis, chief economist at the Bank of Baroda.

He added that there is no clarity on how Russia is being paid by India for imports as on date and one would have to see as to how the system actually works between the two countries.

Can this be extended to other countries?

Sabnavis said that it’s highly unlikely that it will be extended to other countries. India currently allows payment in rupees to countries like Nepal and Bhutan.

“We may want to but others may not accept it as they may need foreign currency to pay for their own imports,” he said, adding that Sri Lanka may also want us to pay in dollars or any other foreign currency.

Will it help arrest the fall of the Indian rupee?

It will help the rupee to a ‘very limited extent’. Rupee, like all global currencies, has been depreciating and the RBI has been using country’s foreign exchange reserves to control the fall. Despite all its attempts, the rupee, on 12 July 2022, hit a new low of 79.60 against the dollar. So far in 2022, the rupee has lost over 6.4 percent against the dollar.