India’s central bank this week introduced a new mechanism for settling international trade in rupees, aimed at promoting exports and facilitating imports.
Besides promoting the international use of the local currency, many exporters and economists see the move as a way to promote trade with countries under Western sanctions, such as Russia and Iran.
Moscow has discussed with India, Iran, Egypt and other countries ways to withdraw dollars and euros from trade transactions.
Here are the key facts regarding India‘s plans for the settlement of international rupee trade.
HOW WILL THE SYSTEM WORK?
To settle international trade transactions in rupees, a foreign bank will need to open a vostro account – an account that a correspondent bank holds on behalf of another bank – with a licensed Indian bank. Indian banks would need prior approval from the Reserve Bank of India to act as correspondent banks. Indian importers of goods or commodities such as oil or coal would make payments to these accounts in rupees. The accounts could then be used to pay Indian exporters in the local currency. Surplus from vostro accounts could be used for investing in government bonds and payment for projects and investments, the RBI said.
WHICH COUNTRIES ARE LIKELY TO USE THE NEW MODEL?
Exporters’ bodies said the RBI’s decision would help support trade with countries under sanctions, mainly Russia and Iran, and with African and South American countries – and neighboring Sri Lanka – which have little access to hard currency. The RBI however did not explicitly name the countries for which a new mechanism could be used. Exporters have lobbied the Indian government to set up such a mechanism, modeled on an earlier system introduced in 2012 to trade with Iran after the United States and other Western countries imposed sanctions. financial.
The exchange rate between the Indian currency and those of trading partners will be determined by the market and settlement will be in rupees. Banks will be allowed to provide letters of credit, bank guarantees and offer advance payments to exporters for commercial transactions.
CURRENT PAYMENT SYSTEM
Currently, international transactions are mostly settled in foreign currencies, such as the US dollar, British pound, euro or yen. Payments in rupees are only allowed for certain neighboring countries, such as Nepal and Bhutan. Indian companies usually pay for imports in foreign currencies, while exporters are paid in foreign currencies and convert to rupees in most cases.
IMPACT ON TRADE WITH SANCTIONED COUNTRIES
Traders have welcomed the new mechanism, which they hope will increase exports of engineering, pharmaceuticals and food grains to Russia and some other countries by at least a few billion dollars this year, while making cheaper crude oil imports. Some commodity traders said they are in contact with buyers in Russia and expect to use the mechanism in the coming days. India’s exports to Iran nearly doubled after a partial rupee swap settlement was introduced in 2012 as it stocked up on cheap oil.
WHAT ARE THE BENEFITS FOR INDIA?
The RBI’s move could slightly reduce India’s growing trade deficit by reducing the price of commodity imports, analysts said, noting that crude oil imports from Russia have been rising in recent months. But government officials said India would proceed with caution on the internationalization of the local currency given the associated risks to the economy, such as high exposure to global shocks, asset bubbles and volatility. foreign exchange rates.