Rupee settlement to spur trade with sanctions-hit nations: Exporters

The RBI has spent about $46 billion since February to defend the rupee, thanks to elevated global commodity prices and interest rate tightening by the US.

The central bank’s move to allow the settlement of exports and imports in the rupee to ease pressure on foreign exchange reserves would spur greater trade with not only Russia but also other sanctions-hit countries like Iran, exporters told FE. The mechanism can also be tapped to trade with Sri Lanka and some African nations that are reportedly facing foreign exchange woes of varying extent, some of them said.

Although the initial impact of the move is unlikely to be substantial, given the limited trade with these nations, it will lead to an internationalisation of the rupee in the long term, which can potentially draw more countries into this bilateral arrangement and augur well for the current account balance, they said. It’s also a necessary step towards the full convertibility of the rupee, they added.

The central bank’s move isn’t aimed at any particular country — sanctioned or other-wise — and all trading partners of India can choose to adopt this mechanism on a bilateral basis.

A Sakthivel, president of the apex exporters’ body FIEO, said it’s a timely move at a time when many countries in Africa and South America are facing forex shortages, allowing imports only through letters of credit.

EEPC India chairman Mahesh Desai said ever since sanctions were imposed on Russia, exports to that country have been very limited due to payment problems. “As a result of the trade facilitation mechanism introduced by the RBI we see the payment issues with Russia easing. The latest move would also reduce the risk of forex fluctuation, especially looking at the euro-rupee parity.”

Jyoti Prakash Gadia, managing director at consultancy firm Resurgent India, said it’s a win-win situation for India and all other countries, including Russia, with whom India can develop direct bilateral trade ties instead of using the regular general multilateral global trade route. “The goods and services can be identified in relation to each such country impacted by sanctions or on account of a dearth of forex reserves.”

“The mechanism provided by the RBI is a robust one and with the facility to open Rupee Vostro accounts for settlement, which also takes care of setting off of exports receivables against imports and suitable use of the surplus generated,” Gadia said.

According to the RBI decision, all exports and imports may be denominated and invoiced in the rupee. The exchange rate between currencies of the two trading partners may be market-driven. The RBI has spent about $46 billion since February to defend the rupee, thanks to elevated global commodity prices and interest rate tightening by the US.

“In order to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/ imports in INR,” the RBI said in a notification on Monday.

For the settlement of trade transactions, the banks concerned will need special rupee Vostro accounts of correspondent banks of the trading partner. “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,” the RBI said.