Rupee Settlement System for International Trade
- Banks serving as certified dealers for such commerce would have to take initial approval from the controller to facilitate this.
- All exports and imports under the invoicing account may be denominated and invoiced in Rupee.
- The exchange rate between the currencies of the two trading associate countries may be market-determined.
- Exporters and importers can use a Unique Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
- These reserves can be used for expenses for projects and investments, import or export advancement flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
- The bank guarantee, setting-off export receivables, advancement against exports, use of extra balance, consent process, documentation, etc., interconnected factors would be protected under FEMA rules.
Why such a move?
- The rupee is at a historic low against the dollar.
- The process is meant to promote trade with countries under sanction.
- Payments had become a distress point for exporters directly after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
- As a result of the trade facilitation means, we see the ease in payment issues with Russia.
- The move would also lower the risk of forex fluctuation, especially looking at the Euro-rupee equality.
- We see this as a foremost step towards 100% convertibility of the rupee.
- It will also help steady the rupee.
What does the change mean for exports?
- Various countries including Sri Lanka and some in Africa and Latin America are facing foreign exchange shortages.
- As such, the new procedures will help India boost its exports.
- It will also aid the purchase of discounted crude oil from Russia, which now accounts for 10% of all imported crude.
Will the move help narrow the trade deficit?
- The interval between India’s exports and imports enlarged to record highs.
- This puts pressure on the current account deficit, which some economists assess would almost double to more than 3% of GDP in FY23.
- RBI’s judgment may not profit the external account instantly, but over the medium term, the market for dollars may come down.
- This is partly because the introduction of new Vostro accounts between banks might take some time.
Currency Convertibility
- Convertibility is the comfort with which a country’s currency can be transformed into gold or another currency through global exchanges.
- It shows the degree to which the rules allow inflow and outflow of capital to and from the country.
- Currencies that aren’t entirely exchangeable, contrary, are typically hard to convert into other currencies.
- Having a convertible currency permits a government to pay for goods and services in a currency that may not be the buyer’s own.
Convertibility of Rupee
- The government of India introduced the partial convertibility of the rupee on March 1, 1992, to face the grave current account deficit in the balance of payments.
- This was an unavoidable move for the expeditious merge of the Indian economy with that of the world.
- With this system, 60 per cent of the exchange earnings were exchangeable in rupees at the market-determined exchange rate and the remaining 40 per cent were at the officially specified exchange rate.
- Current account convertibility links to the disposal of restrictions on payments relating to the international exchange of goals, services and element incomes.
- Capital account convertibility refers to an alike liberalization of a country’s capital trades such as loans and investments, both short-term and long-term.
Conclusion
- As the Rupee weakened, the RBI announced measures which occur to be sought at lowering the ultimatum for foreign exchange, by elevating the rupee settlement of trade flows.
- The RBI said that the issue of Bank Guarantee for trade transactions, undertaken through this arrangement is permitted subject to adherence to provisions of FEMA notifications.
- The Ruppe surplus balance held may be used for permissible capital and current account transactions following mutual agreement.
