RBI spells out re-settlement terms
The RBI said that authorised banks would need to take its permission before instituting the rupee trade settlement mechanism
Mumbai: The Reserve Bank of India (RBI) on Monday said that it is putting in place a mechanism to settle international trade in rupees. The move comes after major Russian banks were removed from the international financial messaging system Swift, making it harder for India to trade with Russia.
The RBI said that authorised banks would need to take its permission before instituting the rupee trade settlement mechanism.
Under the new settlement mechanism, exports and imports under the arrangement will be denominated and invoiced in rupees with the exchange rate between the currencies of the two trading partner countries to be market-determined.
“In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/ imports in INR. Before putting in place this mechanism, AD banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office at Mumbai,” said the RBI in a circular.
Trade between Russia and India stood at $9.4 billion in the financial year 2021-22 so far, up from $8.1 billion in FY 2020-21. India relies on imports of crude oil, petroleum products, gold and other precious metals, precious stones, coal, fertilisers, etc from Russia. In addition, India also imports 60-70 per cent of its military equipment from Russia.
“This opens the door for rupee settlements but brings in a lot of responsibility on banks to take care of FATF (Financial Action Task Force) related obligations,” said Ashutosh Khajuria, vice-president, Federal Bank.
To settle the trade deals, Indian banks will need to open Special Rupee Vostro Accounts of correspondent banks of the partner trading country.
“Indian importers undertaking 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 the overseas seller/supplier,” it said.
Indian exporters undertaking exports of goods and services through this mechanism shall be paid the export proceeds in Indian rupees from the balances in the designated Special Vostro account of the correspondent bank.
This mechanism may enable Indian exporters to receive advance payment against exports from overseas importers in rupees.
As per the circular, the rupee surplus balance held can be used for permissible capital and current account transactions. The balance in vostro accounts can be used for payments for projects and investments; export/import advance flow management; and investment in government bonds. Also, bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation and related aspects would be covered under Fema rules, the RBI said.