International trade in rupee

International trade in rupee

Subject: economy

Why in the news?

The Finance Ministry is scheduled to meet with stakeholders including banks and the Ministries of External Affairs and Commerce to discuss ways to promote international trade in rupee instead of the United States dollar.

Details:

• The aim is to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR.
• It is also expected to help check dollar outflow and slow the depreciation of the rupee to a “very limited extent”.
• To settle trade transactions with any country, banks in India would open Vostro accounts of correspondent bank/s of the partner country for trading. Indian importers can pay for their imports in INR into these accounts. These earnings from imports can then be used to pay Indian exporters in INR.

Present system:

• Currently, exports or imports by a company are always in a foreign currency, with exceptions such as Nepal and Bhutan. 
• In case of imports, the Indian company has to pay in a foreign currency, which is mainly dollars, but could also be pounds, euros, or yen, etc.
• The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its requirements in most of the cases.

International trade settlement in rupee–Mechanism:

• The Reserve Bank of India (RBI) has put in place a mechanism to settle international trade in rupees.
• Exchange rate between the currencies of the two trading partner countries may be market determined.
• For settlement of trade transactions with any country, AD (Authorised Dealer) banks in India may open special rupee vostro accounts of correspondent banks of the partner trading country.
• Indian importers undertaking imports shall make payment in INR which should 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 from the overseas seller /supplier.
• Indian exporters, undertaking exports of goods and services, should be paid the export proceeds in INR from the balances in the designated special vostro account of the correspondent bank of the partner country.
• Exporters may receive advance payment against exports from overseas importers in Indian rupees through the rupee payment mechanism given payment obligations arising out of already executed export orders have been made.
• Further, advance is released only as per the instructions of the overseas importer and advice received from the correspondent bank before releasing the advance.
• Approval of RBI-Bank of a partner country may approach an AD bank in India for opening of a special INR Vostro account and the corresponding AD bank in turn  will seek approval from the Reserve Bank with details of the arrangement.
• Exclusion-Correspondent bank must not be from Financial Action Task Force -high risk and non cooperative jurisdictions on which FATF has called for counter measures.
• Issuance  of bank guarantee for trade transactions, undertaken through this arrangement, is permitted subject to adherence to provisions of FEMA notification.