International Trade Settlements in Rupees

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Why in the News?

Recently, the Reserve Bank of India announced its decision to allow trade settlements between India and other countries in rupees.

Key Points:

About

International Trade Settlements In Rupees

Under the mechanism, to settle trade transactions with any country, banks in India will open Vostro accounts of correspondent bank/s of the partner country for trading.
Indian importers will make payments in rupees, to be credited to the Vostro account of the correspondent bank of the partner country.
Similarly, Indian exporters will be paid the export proceeds in rupees from the balances in the Vostro account of the partner country.
All exports and imports under this arrangement may be denominated and invoiced in rupee (INR) and the exchange rate between the currencies of the two trading partner countries may be market-determined.

Vostro Account:

An account that a correspondent bank holds on behalf of another bank — for example, the HSBC Vostro account is held by SBI in India.

Benefits:

It will promote global trade growth with an emphasis on exports from India.
It will support the increasing interest of the global trading community in the domestic currency.
Such trade will fall out of the ambit of the forex movement and will benefit India at a time when forex reserves are under pressure to save foreign currency.
It may also enable Indian exporters to receive advance payment against exports from overseas importers in rupees.

Geopolitical Significance:

The RBI’s move to set up an International Trade Settlement mechanism in INR would facilitate trade with countries under sanctions like Iran and Russia.
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 and highlights independent Indian Foreign Policy.

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