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Our detailed analysis
The RBI has put in place a mechanism to facilitate international trade in rupees, with effect from July 11, 2022. According to a statement released by the RBI, “This is aimed at promoting the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR”.
According to our experts, this move will help settle trade in Indian rupees, while facilitating cross border transactions for Indian entities and potentially reducing the demand for the greenback. From a trade standpoint, this development may initially largely address transactions with Russia and countries that are not a part of the SWIFT system; and over a period of time address other large trade partners, as they gain comfort in settling transactions in Indian rupees. Overall, these measures can have far reaching economic benefits for the Indian economy, driven by enhancement of global trade from India.
What is the framework for cross border tractions under this arrangement?
The broad framework for cross border trade transactions in Indian rupees, as specified in the Foreign Exchange Management Act, 1999 is summarized in the ensuing bullets:
- Invoicing | All exports and imports under this arrangement can be denominated and invoiced in Indian rupees.
- Exchange rate | Exchange rate between the currencies of the two trading partner countries may be market determined.
- Settlement | The settlement of trade transactions under this arrangement shall take place in Indian rupees, in accordance with specified procedures.
Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, requires authorized dealer banks in India to open Indian rupee vostro accounts. Accordingly, for settlement of trade transactions with any country, the authorized dealer bank in India will need to open a special Indian rupee vostro account of the correspondent bank(s) of the partner trading country.
What is a vostro account?
A vostro account is essentially an account that a bank operates on behalf of another bank, usually from another country, to facilitate wire transfers and other business transactions. In accordance with RBI’s guidelines, the bank of a partner country may approach an authorized dealer bank in India for opening a special Indian rupee vostro account. This authorized dealer bank will need to obtain an approval from the RBI for the same, while providing details of the arrangement.
The authorized dealer bank maintaining a special vostro account will need to ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Co-operative jurisdictions on which FATF has called for counter measures.
What does this mean for Indian importers?
Indian importers undertaking imports through this mechanism can make their payments in Indian rupees, which will get 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 / supplier.
…and Indian exporters?
Indian exporters, undertaking exports of goods and services through this mechanism, can be paid their export proceeds in Indian rupees from the balances in the designated special vostro account of the correspondent bank of the partner country.
Indian exporters may receive advance payments against exports from overseas importers in Indian rupees through this mechanism. Before allowing any such receipt of advance payment against exports, Indian banks will need to ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders / export payments in the pipeline. In order to ensure that advances are released only as per the instructions of the overseas importer, the Indian bank maintaining the special vostro account of its correspondent bank will need to undertake specific due diligence measures and verify the claim of the exporter with the advice received from the correspondent bank, before releasing the advance.
What are the key documentation requirements?
The export / import undertaken and settled in this manner will be subject to the existing documentation and reporting requirements. In this context, letters of credit and other trade related documentation may be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits and Incoterms.
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