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.

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