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RBI Allows International Trade Settlement in Indian Rupees: Detailed Analysis

RBI Allows International Trade Settlement in Indian Rupees: Detailed Analysis

The RBI has taken a noteworthy initiative of promoting global trade in INR. An additional arrangement has been put in place for invoicing, payments and international trade settlement in Indian Rupees. However, AD banks shall be required to obtain prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office (Mumbai) before implementing this mechanism.

Following is the mechanism as highlighted in the RBI Circular RBI/2022-2023/90 dated 11th July 2022

AD banks in India are permitted to open Rupee Vostro accounts. Further, for settlement of trade in INR with any country, AD banks in India may open a Special Rupee Vostro account of the correspondent banks of the partner trading country. Now-

  • Indian importers that import through this mechanism shall make payments in INR which shall be credited into the Special Vostro accounts of the correspondent banks of the partner trading country.
  • Indian exporters exporting through this mechanism shall be paid the export proceeds in INR from the balance lying in the designated Special Vostro accounts of the correspondent banks of the partner trading country.

The above mechanism will allow international trade settlements in Indian Rupees and is a key step for further streamlining the payment systems for international trade. Following are some of the key points in relation to the above mechanism:

1). Advance Against Exports

Advance can be availed of by the Indian exporter from the Special Vostro accounts. However, before allowing any such payment, the Indian banks shall ensure that the funds available in the account are utilized towards payment obligations of the already executed export orders or payments. Further, to ensure that the funds are released as per the instructions of the overseas importer, the Indian banks must verify the exporter’s claims with the advice received from the correspondent bank before releasing the advance payment.

2). Setoff of Export Receivables

In case both exports and imports are undertaken from the same overseas buyer cum supplier, then exports receivable shall be allowed to be set off against imports payable subject to the conditions outlined in para C.26 on Set-off of export receivables against import payables under Master Direction on Export of Goods and Services 2016 (as amended from time to time).

3). Bank Guarantee

The issue of bank guarantees for trade transactions undertaken through this arrangement shall be allowed subject to adherence to the FEMA provisions

4). Use of Surplus Balance

The surplus balance can be used for permissible capital and current account transactions as per the mutual agreement. The balance lying in Special Vostro accounts can be used for:

  • Export-import advance flow management
  • Payments for investments and projects
  • Investment in Government Securities, Government Treasury Bills etc. within the limits and as per the guidelines and FEMA provisions.

5). Other Points

The reporting of these transactions shall be done as per FEMA. Further, any bank of the partner country may approach an AD bank in India for opening a Special Vostro account. The AD bank shall do so after seeking approval from RBI. Further, it should be ensured that the correspondent bank is not from a country or jurisdiction in the updated FATF statement on High Risk & Non-Cooperative jurisdictions.

Final Thoughts

Currently, the settlement for international trade was permissible in the freely convertible foreign exchange. The above mechanism for global trade in INR is a welcome move and as the trade progresses through the above route, INR may become a dominant currency for trade with India in the future. In case of any query,

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