RBI allows payments for cross-border trade in rupee

Tags: Economy/Finance

The Reserve Bank of India (RBI) on 11 July allowed invoicing and payments for international trade in rupees.

• Rupee Settlement System for International Trade

• Banks acting as authorized dealers for such transactions would be required to obtain prior approval from the regulator to facilitate the same.

• Under the invoicing system, all exports and imports can be denominated and invoiced in rupees.

• The exchange rate between the currencies of two trading partner countries can be determined by the market.

• Exporters and importers can now use a special Vostro account linked to the partner country's bank for receipts and payments in Rupees.

• A Vostro account is one that is opened by a bank on behalf of a foreign bank in its home country.

• These accounts can be used to pay for projects and investments, manage import or export advances, and invest in Treasury bills.

• Bank guarantees, adjustment of export receivables, advances for exports, utilization of surplus funds, approval process, documentation etc. will be covered under FEMA rules.

• Why did RBI take this step?

• The rupee is at a historically low level against the dollar.

• This mechanism has been brought in to facilitate trade with sanctioned countries.

• Payments became difficult for exporters immediately after the Russo-Ukraine War broke out.

• Payment issues with Russia could be eased as a result of the Trade Facilitation Mechanism introduced by RBI.

• The move will also reduce the risk of forex fluctuations, especially in view of the Euro-Rupee parity.

• This can be seen as the first step towards 100% convertibility of rupee.

• This will also help to stabilize the rupee.

• Many countries including Sri Lanka and some countries in Africa and Latin America are facing foreign exchange crunch.

• The new mechanism will help India promote its exports.