'Rupees' Global Showdown
Monday, 22 August 2022, 10:00 IST
The RBI declared a preparation for domestic traders to resolve imports and exports in rupees. The central bank stated this would facilitate global trade growth with a focus on exports from India and support the increasing interest of the international trading community in the domestic currency. India's trade with Russia stood at $13.1 billion in 2021-22. This arrives amid the rupee touching record lows against the dollar. Before putting this in place, all Category-I Authorised Dealer (AD) banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office at Mumbai. Presently, 60 percent of export/import payments by Indian firms are denominated in the US dollar, about 5-10 percent in rupee, and the balance in other currencies, including the euro. Even in cases where an Indian exporter obtains the payments in rupee, the settlement at the sovereign level is done in dollars, with the exchange rate risk borne by the individual trader.
Cross Border Trade Transactions in INR is as Below:
All the exports and imports under this agreement may be denominated and invoiced in INR. The conversion rate between the currencies of the two trading partner countries may be market-determined. The payment of trade transactions under this arrangement shall appear in INR under the procedure in Para three of this circular.
Regarding Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Hence, 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.
To permit the settlement of international trade transactions through this understanding, it has been decided that: Indian importers embarking on 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 overseas seller /supplier.
Indian exporters embarking on exports of goods and services through this mechanism shall be paid the export proceeds in INR from the balances in the selected Special Vostro account of the correspondent bank of the associate country. The export/import embarked and settled in this form shall be subject to documentation and reporting needs. Letter of Credit and further trade-related documentation may be determined mutually between banks of the partner trading countries under the framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms. Swapping messages safely, securely, and efficiently may be mutually decided upon between partner countries' banks.
Indian exporters may accept advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism. Before letting any such receipt of advance payment against exports, Indian Banks shall confirm that available funds in these accounts are used for payment commitments arising from already executed export orders/export payments in the pipeline. Guarantee that the advance is released only as per the order of the overseas importer. The Indian bank holding the Special Vostro account of its correspondent bank shall, apart from usual due persistence measures, confirm the exporter's share with the advice obtained from the correspondent bank before releasing the advance. 'Set-off' of export receivables against import payables in consideration of the same overseas consumer and supplier with a facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be permitted, subject to the conditions mentioned in para C.26 on Set-off of export receivables against import payables under Master Direction on Export of Goods and Services 2016.
Issue of Bank Guarantee for trade transactions undertaken through this arrangement is permitted subject to FEMA Notification No. 8, amended from time to time, and the Master Direction on Guarantees & Co-acceptances provisions. The Rupee surplus balance may be used by mutual agreement for permissible capital and current account transactions.
The balance in Special Vostro Accounts can be used for:
Payments for projects and investments, Export/Import advance flow management, and investment in Government Treasury Bills, Government securities, and others, in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provisions. Cross-border transactions need to be reported in terms of the extant guidelines under FEMA 1999. AD bank maintaining the particular Vostro Account shall ensure that the correspondent blank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures. The bank of a partner country may talk to an AD bank in India to open a Special INR VOSTRO account. The AD bank will pursue approval from the Reserve Bank with details of the arrangement.
What Experts say About New Mechanism?
Experts praising the move said it would expedite trade between the two countries. Following the sanctions, payments to any Russian entity, including those not sanctioned, have taken longer than usual because of improved due diligence. Sakthivel,president of the Federation of Indian Export Organisations (FIEO), under the current provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. If RBI agrees, the final payment to all countries can be in the Indian rupee, Sakthivel stated.
"The Russian banks should have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited, relying on the transaction", told a senior private sector banker, counting that this will only be viable for Russian banks that are not part of the OFAC sanctions list.
Implemented by the US Office of Foreign Assets Control (OFAC), the sanctions were enforced after Russia's invasion of neighboring Ukraine in February. Indian banks had long expected that the government and RBI would work out an alternative payment mechanism, as was done when Iran sanctions were levied in 2012 and again in 2018.
"It is a good move as far as India is worried. Since we import more than we export, we will save foreign currency under the new arrangement. For instance, under normal circumstances, we would have had to pay Russia in dollars for oil purchases, which can now be done through the rupee rouble route", stated Madan Sabnavis, chief economist, Bank of Baroda.
Industry experts said the pressure on India's forex reserves would diminish, a collateral benefit of the move to allow trade in rupees. In addition, the opening of this trade settlement route shows Russia's importance as India's trading partner in the face of increasing pressure from Western countries to cut links. That said, bankers believe this route will be restricted to Russia for the time being, and it is unlikely that other large trade partners would prefer settling transactions in rupees.
Others saw it as an extension to RBIs announcements last week to enhance forex inflows and as a step to stabilize the rupee. Economists at Barclays said the measures are aimed primarily at reducing the demand for foreign exchange for settlement purposes of current account related trade flows.
Cross Border Trade Transactions in INR is as Below:
All the exports and imports under this agreement may be denominated and invoiced in INR. The conversion rate between the currencies of the two trading partner countries may be market-determined. The payment of trade transactions under this arrangement shall appear in INR under the procedure in Para three of this circular.
Regarding Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Hence, 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.
Cross-border transactions need to be reported in terms of the extant guidelines under FEMA 1999
To permit the settlement of international trade transactions through this understanding, it has been decided that: Indian importers embarking on 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 overseas seller /supplier.
Indian exporters embarking on exports of goods and services through this mechanism shall be paid the export proceeds in INR from the balances in the selected Special Vostro account of the correspondent bank of the associate country. The export/import embarked and settled in this form shall be subject to documentation and reporting needs. Letter of Credit and further trade-related documentation may be determined mutually between banks of the partner trading countries under the framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms. Swapping messages safely, securely, and efficiently may be mutually decided upon between partner countries' banks.
Indian exporters may accept advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism. Before letting any such receipt of advance payment against exports, Indian Banks shall confirm that available funds in these accounts are used for payment commitments arising from already executed export orders/export payments in the pipeline. Guarantee that the advance is released only as per the order of the overseas importer. The Indian bank holding the Special Vostro account of its correspondent bank shall, apart from usual due persistence measures, confirm the exporter's share with the advice obtained from the correspondent bank before releasing the advance. 'Set-off' of export receivables against import payables in consideration of the same overseas consumer and supplier with a facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be permitted, subject to the conditions mentioned in para C.26 on Set-off of export receivables against import payables under Master Direction on Export of Goods and Services 2016.
Issue of Bank Guarantee for trade transactions undertaken through this arrangement is permitted subject to FEMA Notification No. 8, amended from time to time, and the Master Direction on Guarantees & Co-acceptances provisions. The Rupee surplus balance may be used by mutual agreement for permissible capital and current account transactions.
The balance in Special Vostro Accounts can be used for:
Payments for projects and investments, Export/Import advance flow management, and investment in Government Treasury Bills, Government securities, and others, in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provisions. Cross-border transactions need to be reported in terms of the extant guidelines under FEMA 1999. AD bank maintaining the particular Vostro Account shall ensure that the correspondent blank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures. The bank of a partner country may talk to an AD bank in India to open a Special INR VOSTRO account. The AD bank will pursue approval from the Reserve Bank with details of the arrangement.
What Experts say About New Mechanism?
Experts praising the move said it would expedite trade between the two countries. Following the sanctions, payments to any Russian entity, including those not sanctioned, have taken longer than usual because of improved due diligence. Sakthivel,president of the Federation of Indian Export Organisations (FIEO), under the current provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. If RBI agrees, the final payment to all countries can be in the Indian rupee, Sakthivel stated.
"The Russian banks should have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited, relying on the transaction", told a senior private sector banker, counting that this will only be viable for Russian banks that are not part of the OFAC sanctions list.
Implemented by the US Office of Foreign Assets Control (OFAC), the sanctions were enforced after Russia's invasion of neighboring Ukraine in February. Indian banks had long expected that the government and RBI would work out an alternative payment mechanism, as was done when Iran sanctions were levied in 2012 and again in 2018.
"It is a good move as far as India is worried. Since we import more than we export, we will save foreign currency under the new arrangement. For instance, under normal circumstances, we would have had to pay Russia in dollars for oil purchases, which can now be done through the rupee rouble route", stated Madan Sabnavis, chief economist, Bank of Baroda.
Industry experts said the pressure on India's forex reserves would diminish, a collateral benefit of the move to allow trade in rupees. In addition, the opening of this trade settlement route shows Russia's importance as India's trading partner in the face of increasing pressure from Western countries to cut links. That said, bankers believe this route will be restricted to Russia for the time being, and it is unlikely that other large trade partners would prefer settling transactions in rupees.
Others saw it as an extension to RBIs announcements last week to enhance forex inflows and as a step to stabilize the rupee. Economists at Barclays said the measures are aimed primarily at reducing the demand for foreign exchange for settlement purposes of current account related trade flows.
