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RBI sets up mechanism to settle trade transactions in rupees – Moneycontrol

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The Reserve Bank of India (RBI) on July 11 said that it was putting in place a mechanism to settle international trade in rupees.

The central bank’s move, which it said was to promote growth of global trade and to support increasing global interest in the rupee, comes amid increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine.

Moreover, the move to facilitate trade settlement in rupees could also allow India to bypass certain orders that prevent the use of a global currency such as the US dollar for trade with certain countries. For instance, Russia’s attack on Ukraine has seen several countries impose sanctions on the former, with the US cutting off Russia’s access to the dollar. This has made Indian companies, looking to take advantage of the lower price of Russian commodities, consider alternative modes of payment for imports.

As part of its move today on July 11, the RBI said authorised banks would need to take its permission before instituting the rupee trade settlement mechanism.

As per 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.

To settle these trade deals, authorised Indian banks will need to open Special Rupee Vostro Accounts of the partner trading country’s bank. Indian importers using this mechanism will need to pay in rupees. This will 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.

Indian exporters, on the other hand, will be paid in rupees from the balance in the designated special vostro account of the correspondent bank of the partner country.

Indian exporters can also be paid in advance in rupees under this mechanism. However, before such advance payment is made, banks must ensure that funds available in the concerned accounts are first used to make payments for those export orders that have already been executed.

If there are any surplus rupees available in a special Vostro account, they can be used for certain capital and current account transactions by mutual agreement, the RBI said. As per the central bank, these surplus rupees can be used to pay for projects and investments in government securities, among other purposes.

In case a bank from a trade partner country approaches an authorised Indian bank to open a special rupee Vostro account, the Indian bank must seek the RBI’s approval for the same and provide details of the arrangement.

“AD (Authorised Dealer) bank maintaining the special Vostro Account shall ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF (Financial Action Task Force) Public Statement on High Risk & Non Co-operative Jurisdictions on which FATF has called for counter measures,” the RBI said in a notification on July 11.

The new trade settlement mechanism comes amid talks that the Indian central bank was trying to put in place a rupee-ruble trade system. However, the mechanism announced today is far wider in scope in terms of currencies.