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Russia, Sri Lanka first to use Indian rupee trade settlement mechanism

India’s Central Bank has approved banks to open 05 special rupee trading accounts, called Vostro accounts, for trade with Sri Lanka through the Indian rupee trade settlement mechanism

Published: Sun 18 Dec 2022, 6:46 PM

By
Issac John

The government is looking to bring more countries that are short of dollars into the mechanism.

Dollar-strapped Sri Lanka and sanctions-hit Russia will be the first countries to use the Indian rupee trade settlement mechanism, a game-changing initiative that allows using Indian rupees instead of dollars and other major currencies for International transactions.

India’s Central Bank has approved banks to open 05 special rupee trading accounts, called Vostro accounts, for trade with Sri Lanka through the Indian rupee trade settlement mechanism.

Similarly, the Reserve Bank of India has given approval to banks to open 12 ‘Vostro’ for trade in rupees with Russia. Another account for trade with Mauritius has also been authorized by the RBI, which set up the mechanism in July.

According to an Indian government official, the government is looking to bring more countries that are short of dollars into the mechanism. As of now, five to six banks have been allowed to open Vostro accounts to facilitate international trade settlement in rupees

“A number of issues have been sorted out. Exporters and importers have begun approaching banks for opening of the accounts," Federation of Indian Export Organisations (FIEO) director general Ajay Sahai said. “So, trade settlement with Russia under the new payment system is expected to commence soon for some shipments," Sahai added.

The move assumes significance amid a widening trade gap between Russia and India. While Russia has swiftly become India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the lack of a smooth payment mechanism.

India's rupee trade settlement mechanism is also attracting interest from other countries including Tajikistan, Cuba, Luxembourg and Sudan.

The RBI has prepared a concept paper for trade settlement in the Indian rupee with the country's third-largest trading partner the UAE. According to Sunjay Sudhir, India's Ambassador to the UAE, the Central Bank of the UAE is looking at the matter and discussing it with the RBI officials to operationalise the mechanism.

“We had a meeting in September. We have shared RBI’s concept paper with the UAE, which has already designated a nodal person for this. Both countries’ central banks are in talks with each other to operationalise trading in local currencies. The main objective of this is to reduce the cost of the transaction,” Sudhir has said.

Following the opening of Vostro accounts, Sri Lankan citizens can now hold $10,000 (Rs8,26,823) in physical form. This also means that Sri Lankans and Indians can use Indian rupees instead of US dollars for international transactions with each other. The Indian government since July this year, has been looking to bring countries that are short of dollars, into its rupee settlement mechanism.

Designating rupee as a legal currency in Sri Lanka will provide the country with much-needed liquidity support to help it tide over its economic crisis amid inadequate availability of the dollar. The country's economy is more likely to prevent further intensification of the balance of payments crisis when the investors begin selling off in domestic currency.

India's finance ministry has also asked the Indian Banks’ Association (IBA) and the FIEO to begin an awareness campaign to sensitise stakeholders about the rupee trade.

The RBI has detailed the broad framework for cross-border trade transactions in rupees under the Foreign Exchange Management Act, 1999. As per this, all exports and imports under this arrangement may be denominated and invoiced in rupees. Exchange rates between the currencies of the two trading partner countries may be market determined. The settlement of trade transactions under this arrangement must take place in rupees.

Indian importers undertaking imports through this mechanism need to make payment in rupees which must be credited into the Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller or supplier. Similarly, Indian exporters, undertaking exports of goods and services through this mechanism, must be paid the export proceeds in rupees from the balance in a designated Vostro account of the correspondent bank of the partner country.

Currency experts said the rupee becoming an international currency would likely reduce India's trade deficit. The rupee will be strengthened in the global market. Other countries may start adopting the rupee as their trade currency.

Earlier in the 1960s, the rupee was accepted in gulf countries such as Qatar, the UAE, Kuwait, and Oman. India also had payment agreements with Eastern Europe and the rupee was used as a unit of account under these payment agreements. However, in the mid-1960s, these arrangements were terminated.

The rupee can be transformed into an international currency by making it a stable currency to enable international trade or by keeping it as an asset. A currency is generally termed 'international' if it is widely accepted across the world as a medium of exchange for trade.

— issacjohn@khaleejtimes.com