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Promoting International Trade In Rupee To Help Reduce Currency Volatility

  • February 1, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Promoting International Trade In Rupee To Help Reduce Currency Volatility

Subject : Economics

Concept :

  • Promoting international trade in the domestic currency will help in protecting the rupee from volatility and reduce cost of doing business in the global markets, Economic Survey said on Tuesday.

INR as International Currency

  • The Survey highlights that efforts are underway to promote international trade settlement in Indian Rupees.
  • International settlement in rupee acquires significance against the backdrop of the US Federal Reserve aggressively hiking the policy rates and its hawkish stand.
  • Once these initiatives gain traction, dependence on foreign currency would potentially reduce, making the economy less vulnerable to external shocks.
  • In July 2022, the Reserve Bank of India (RBI) issued a circular permitting an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian Rupees (INR) to promote the growth of global trade with emphasis on exports from India and to support the increasing interest in the global trading community in INR as an international currency.
  • The framework involves invoicing of exports and imports in INR, market-determined exchange rates between the currencies of the trading partner countries, and settlement through special Rupee Vostro accounts opened with authorised dealer banks in India.
  • The Survey states that the framework is significant as this could largely reduce the net demand for foreign exchange and could assist Indian exports in getting advance payments in Indian Rupees from overseas clients.
  • It mentions that in the longer terms this could promote Indian rupees as an International currency once the rupee settlement mechanism gains traction.

Special Rupee Vostro accounts

  • The settlement of trade transactions under this arrangement shall take place in INR.
  • In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, Authorised Dealer banks in India have been permitted to open Rupee Vostro Accounts.
  • For settlement of trade transactions with any country, AD banks in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
  • In order to allow settlement of international trade transactions through this arrangement, it has been decided that:
    • Indian importers undertaking imports through this mechanism shall make payment in INR which shall 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 through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
  • Use of Surplus Balance: The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in Special Vostro Accounts can be used for:
    • Payments for projects and investments.
    • Export/Import advance flow management
    • Investment in Government Treasury Bills, Government securities, etc. in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provision.

Vostro account:

  • Vostro is a Latin word that translates to “your,” as in “your account.”
  • A vostro account is an account a correspondent bank holds on behalf of another bank.
  • A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank.
  • Vostro account services include executing wire transfers, performing foreign exchange transactions, enabling deposits and withdrawals, and expediting international trade.
  • For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer’s behalf, the account is deemed by the holding bank as a vostro account of the insurance company.
  • From the foreign correspondent bank’s point of view, the funds held on behalf of other banks are referred to as vostro accounts and are denominated in the local currency.
  • From the perspective of domestic banks, the funds deposited at correspondent banks are referred to as nostro accounts.
  • Nostro accounts are denominated in the foreign currency of the correspondent bank.
Center for Disease Dynamics Economics & Policy (CDDEP) Promoting International Trade In Rupee To Help Reduce Currency Volatility

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