RBI Notifies New Framework to Enable International Trade Settlement in Indian Rupee

Posted by Written by Naina Bhardwaj Reading Time: 4 minutes

The Reserve Bank of India has instituted a new mechanism to enable international trade settlement in Indian Rupee (INR). The central bank notified this on July 11, 2022. The move comes as several countries, led by the US and EU, have imposed sanctions on countries like Russia and Iran, making India’s bilateral trade and payment settlements difficult with these respective countries.

Through a notification dated July 11, 2022, the Reserve Bank of India (RBI) has enabled international trade settlements between India and other countries, including Sri Lanka and Russia, in India’s domestic currency – Rupee (INR), with immediate effect. The new mechanism allows an additional arrangement for invoicing, payment, and settlement of exports and imports in INR. According to the RBI, this mechanism has been instituted to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in the Indian Rupee.

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This move by the RBI, India’s central bank, comes in the wake of increasing pressure on the Indian currency, following the Russia-Ukraine conflict and sanctions by the US and the European Union (EU) on certain countries. For instance, following the Russia-Ukraine conflict, several countries had imposed sanctions on Russia, which left Indian companies desperate for alternative modes of payment for imports.

The new mechanism enabled by the RBI will facilitate importers and exporters to circumvent rules that prevent the use of a global currency, such as the US dollar for trade with certain countries.

What is the framework outlined by the RBI for cross-border trade transactions in the Indian Rupee?

Invoicing

In this new international trading framework, all exports and imports under will be denominated and invoiced in Indian Rupee.

Exchange rate

Without mentioning the name of the countries, the RBI has clarified that the exchange rate between the domestic currencies of the two trading partner countries will be market determined.

Settlement

As per the RBI notification, the settlement of trade transactions under this arrangement shall take place in Indian Rupee, in accordance with the procedure outlined below.

  1. For settlement of trade transactions with any country, the authorized dealer bank in India must open Special Rupee Vostro Accounts of the correspondent bank of the partner trading country.
  2. 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 or supplier.
  3. Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balance amount in the designated Special Vostro Account of the correspondent bank of the partner country.

What is the documentation requirement in this new international trade payment mechanism?

There is no change in documentation requirements for export and import undertaken and settled under this new framework. Letter of Credit and other trade related documentation may be decided mutually between banks of the partner trading countries under the overall framework of the Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms.

The reporting of these cross-border transactions must be done in accordance with the existing guidelines under the Foreign Exchange Management Act (FEMA), 1999.

How can Indian exporters avail the advance against exports in this new mechanism?

Indian exporters may receive advance payment against exports from overseas importers in Indian Rupees, once permitted by the concerned Indian banks. Before allowing any such receipt of advance payment against exports, Indian banks will have to ensure that available funds in these accounts are first utilized towards payment obligations arising out of already executed export orders and pending export payments.

To ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro Account of its correspondent bank shall, apart from usual due diligence measures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance.

The grant of such permission must be in accordance with the conditions outlined in Master Direction on Export of Goods and Services, 2016. The same rules also govern “set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier.

How can the Indian Rupee surplus balance in Special Vostro Account be used?

This INR surplus balance in the Special Vostro Account can be used for the following purposes:

  • Payments for projects and investments
  • Export and import advance flow management
  • Investment in government treasury bills, securities, etc., subject to FEMA and other statutory provisions

What is the approval process for instituting this new international trade payment mechanism?

All the authorized dealer banks who adopt this mechanism must first seek prior approval from the Foreign Exchange Department of RBI, Central Office at Mumbai.

The bank of a partner country may approach an authorized dealer bank in India for opening of a Special Rupee Vostro Account. The authorized dealer bank will seek approval from the RBI with details of the arrangement. The authorized dealer bank maintaining the Special Vostro Account shall ensure that the correspondent bank is not from a country or jurisdiction in the updated Financial Action Task Force (FATF) Public Statement on High Risk and Non Co-operative Jurisdictions, on which FATF has called for counter measures.

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