The bank of a partner country may approach an authorised dealer bank in India for opening of special Indian rupee vostro account. The bank will seek approval from the Reserve Bank with details of the arrangement, the central bank said.
The circular added that the method of exchange of messages in safe, secure, and efficient way may be agreed mutually between the banks of partner countries. Until now, most messages regarding financial transactions went via the SWIFT network. On the outbreak of the Russia-Ukraine war, Russia had been excluded from this network.
Assessing The Impact
The RBI’s new mechanism will likely resolve the ongoing trade settlement issues with Russia, said a banker, who spoke on condition of anonymity. This banker said that the arrangement to one which existed in the 1980s. The option to invest surplus amounts in Indian government securities is a great way to internationalise the rupee and make Indian rupees part of forex reserves of other countries, this banker said.
A second banker, who also spoke on condition of anonymity, explained that the new scheme, if successful, will reduce the exchange rate risk for importers and exporters.
For example, if an Indian exporter is exporting garments to Russia, the RBI and the Russian central bank would have a reference rate to value the export in rupee terms. Once the Russian company has settled your payments in rupees, the Indian exporter could theoretically use that to pay for import of raw materials from China under the new scheme. The Chinese company could, in turn, use those rupees for any other imports from India.
The structure essentially helps in lowering the exchange risk for domestic traders, this banker said.
The RBI’s move to set up an international trade settlement mechanism in Indian rupees would facilitate trade with countries under sanction like Iran and Russia, said Mahesh Desai, chairman, EEPC.
“Ever since sanctions were imposed on Russia, trade has been virtually at a standstill with the country due to payment problems. As a result of the trade facilitation mechanism introduced by the RBI we see the payment issues with Russia easing,” Desai said. The move would also reduce the risk of forex fluctuations, he added.
“The move comes at a time when many countries are facing huge forex shortage in Africa and South America and are allowing only export import transactions through Letters of Credit,” said Ajay Sahai, director general and CEO of the Federation Of Indian Export Organisations. “This will help our exporters and importers and pave the way for trading and settlement of transactions in Indian rupee,” Sahai said. He, however, added that the government will need to clarify whether benefits available on foreign currency exports will be available here too.
The new mechanism, can, at best, be considered a baby step, said Ritesh Bhansali, Vice President at Mecklai Financial Services. “But it will be difficult to convince other foreign suppliers to invoice in rupees. Similarly, foreign importers will not be comfortable in paying in rupees as the currency risk will fall on their shoulders in such a scenario,” Bhansali said.