RBI’s move to increase trade in rupee

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Last Updated18/07/2022

The Reserve Bank of India (RBI) issued a circular that detailed ‘additional arrangement’ for invoicing, payment, and settlement of exports and imports in Indian rupees.

Indian importers could make payment in rupees to the Special Vostro account of the correspondent bank of the partner country, against invoices for the supply of goods or services from the overseas seller.
Indian exporters shall be paid proceeds in rupees from the balances in the designated vostro account of the correspondent bank of the partner country.

Vostro accounts were not widely used because exporters prefer settlements in a strong and stable currency.
Three new aspects to the newly-issued circular
Exchange of messages in a safe, secure and efficient way may be agreed upon mutually between the banks of partner countries.
- It may be recalled that soon after Russia invaded Ukraine, the Belgium-based SWIFT, or Society for Worldwide Interbank Financial Telecommunication, a system that allows instant messaging among banks, began excluding Russian banks from transacting through this channel. The aim was to make it difficult and tedious for Russian entities to transact with the rest of the world. The RBI’s circular could be taken to mean that partnering banks may use any messaging system they deem fit and not confine themselves to the SWIFT platform.
Rupee surplus balance held in the vostro accounts may be used by the foreign entities for payments for projects and investments in India as also for investment in Indian government treasury bills and government securities.
Vostro accounts did not need permission earlier.
Now the RBI has specified that banks acting as authorised dealers need to secure prior approval from the regulator to put in place this mechanism.

The RBI’s fresh directive seems intended to ease doing business with Russia.
Russia may be the first country to show interest in using this facility.
Russia enjoys a trade surplus with India and would be unlikely to prefer payments in currencies such as the dollar or the euro when it is facing sanctions from the West.

For India, doing business with Russia using rupees would mean there is no hard currency outflow in such transactions.
The impact on the rupee market is that foreign currency outflow would be lower by $3 billion every month.
Technically, it would ease the downward pressure on the rupee, which has been sliding to record lows frequently in the recent past.
However, any easing of the downward pressure on the rupee would be seen only in the medium–to–long term because in the current scenario, payments to Russia have anyway not been going through and a credit system has helped continuity of trade.
If other countries too begin showing interest in using the facility, then a strengthening impact may be seen more quickly for the rupee.

Larger banks may not immediately set up vostro accounts.
If the sanctions on Russia widen, such banks would not want to be caught in an environment where other parts of their international business get impacted.
Smaller banks may be ideal for the purpose and could provide the service with a little bit of push by the Indian government, if need be.