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Settlement of international trade in rupees

  • July 12, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Settlement of international trade in rupees

Subject: Economy

Context:

In a circular issued to commercial banks on Monday, the RBI said all exports and imports under this arrangement may be denominated and invoiced in rupee (INR).

Cause:

  • Currency depreciation- increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU.
  • Promote international trade-facilitate importers and exporters to avoid rules that prevent the use of a global currency such as the US dollar for trade with certain countries.

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.

Concept :

Determination of exchange rate between two currency:

  • Exchange rate between two currencies (other than one being the US$)  is derived indirectly.
  • For example-Rupee-Rouble exchange rate 
    • Suppose, INR-dollar is Rs 77 and Rouble-dollar is 110. Ergo, Russians have to shell out 1.428 (110 by 77) Roubles for every INR.

Authorised Dealers:

  • Authorised dealers are the institutions that have the license from the RBI to sell and buy foreign currencies. Most of the authorised dealers are banks.
  • As per the Foreign Exchange Management Act, 1999, the Reserve Bank, on an application, may authorise any person to be known as an authorised person, to deal in foreign exchange as an Authorised Dealer.
  • There are three types of authorised dealers, depending upon the type of institutions.
    • Category I Authorised Dealers are select banks who can carry out all permissible current and capital account transactions as per directions issued from time to time. There are 106 authorised dealers of Category -I as per the RBI regulations.
    • Category II are select entities to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers and any other activity as decided by the Reserve Bank.
    • Category III ADs are select financial and other institutions (as Authorised Dealers Category-III) to carry out specific foreign exchange transactions incidental to their business / activities.

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.
economy Settlement of international trade in rupees
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