After months of deliberations, the Centre has finally brought an amendment in its foreign trade policy to facilitate international trade in rupee. The Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce and Industry on 16th of September 2022, notified the changes to the policy. The central bank allowed authorised banks in India to open special rupee Vostro accounts of correspondent banks of any partner trading country to facilitate trade in the Indian currency.
The amendment in this policy will allow international trade invoicing, payment and settlement in the Indian rupee, activating the mechanism announced by the Reserve Bank of India (RBI) to facilitate trade in the domestic currency. While the move to allow trade settlements between India and other countries in rupees was seen to primarily benefit trading with Russia, it was also expected to help check dollar outflow and slow the depreciation of the rupee.
The Department of Commerce has also been asked to reach out to traders to encourage them to adopt this route. Under the arrangement, Indian importers will make payment in rupees into the special Vostro account of the partner country bank against the invoices for the supply of goods or services from the overseas seller or supplier, the trade policy stated.
“Indian exporters undertaking exports of goods and services through this mechanism shall be paid the export proceeds in Indian Rupees from the balances in the designated special Vostro account of the correspondent bank of the partner country,” it added. Finance minister Nirmala
Sitharaman had last week held a meeting to review the proposed trade in rupee and asked banks to speed up the process of opening special rupee Vostro accounts. The Department of Commerce has also been asked to reach out to traders to encourage them to adopt this route.
Currently, exports or imports are always in a foreign currency, with exceptions such as Nepal and Bhutan. So, in case of imports, the Indian company has to pay in a foreign currency, which is mainly dollars, but could also be pounds, euros, or yen, etc.The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its requirements in most of the cases.
Finance minister Nirmala Sitharaman recently reviewed the proposed trade in rupee and had asked banks to speed up the process of opening special rupee Vostro accounts. The Finance Minister also said that many countries have evinced interest in bilateral trade in the rupee after the RBI announced a mechanism recently. Speaking at an event, she had said this along with other steps taken by the government is towards full capital account convertibility.
“It isn’t the ruble-rupee which was in the old format. Now this (bilateral rupee trade) formulation, which I am glad the RBI has come up at a time which was so critical,” she said when asked if India is ready for capital account convertibility. In July, the RBI unveiled a mechanism to settle international trade in rupees to counter the impact of the depreciation of global currencies. The
move was seen as aiming to promote trade with Russia, as the country used a similar mechanism to settle payments with Iran, which has also faced sanctions by the West.
The amendment in the policy is aimed 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 the Indian National Rupee. The move’s objective is not to address the depreciation of the rupee but rather to promote international trade in the rupee.