Trade settlement mechanism in Indian Rupees

Russia has become the first country to start foreign trade in Indian rupee closely followed by Sri Lanka which is expected to use the Indian rupee trade settlement. Saudi Arabia and UAE may also start payment mechanism in India Rupees.  Bangladesh, Nepal and Myanmar, Tajikistan, Cuba, Luxembourg and Sudan have also shown their keenness in using the mechanism.  Besides these countries 35 more countries are showing interest in understanding the rupee trade mechanism to adopt.

Reserve Bank of India has set up India’s rupee trade settlement mechanism.  Reserve Bank of India stated in its statement that “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in India Rupee it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian Rupee.   This move of RBI’s is a progressive step to internationalize Indian Rupee. This will reduce India’s demand for dollars and thereby reduce depreciation pressure on our currency.

India’s rupee trade settlement mechanism is a method in which Indian Rupee is used instead of dollars and other big currencies for international transactions.   Heather to for import and export of goods and services, countries have to make payments in a foreign currency and since the USD is the world’s most sought-after reserve currency, most of the transactions are settled in US dollars.   Use of Rupee in cross-border transactions mitigates currency risk for Indian business.  Protection from currency volatility not only reduces cost of doing business, but also enables better growth of business and improves the chances for Indian business to grow globally.  Reduced dependence on foreign currency makes India less vulnerable to external shocks.   This would improve the bargaining power of Indian business would improve adding weight to the Indian economy, enhancing India’s global stature and respect.

To illustrate if a buyer in India enters into a transaction with a seller from Australia, first he has to convert Indian rupee into USD to make payment.  The seller, after receiving payment in USD, will have to get the amount received converted into Australian dollars.   In the process both the parties will have to bear the conversion expenses and run the risk of foreign exchange rate fluctuations.   By opening a vostro account, the countries can get the invoice of the goods and services made in Indian rupees instead of paying and receiving US dollars, if the counterparty has a Rupee Vostro account.   When an Indian buyer opts to make transaction in Indian rupees with a foreign trader, the amount will be credited to this Vostro account. When the Indian exporter needs to be paid for goods supplied in Indian rupees, the Vostro account of foreign party will be deducted, and the amount will be credited to the exporter’s account.

The Industrial experts have welcomed the move and upbeat about the same.

Allowing trade settlement in rupee is a good move and a step towards making the rupee an international traded currency. This would make the rupee more tradable globally in offshore centres. The acceptance of the rupee will go up. Since the invoice will be in rupee, the foreign exchange risk will get transferred to the overseas buyer – Abhishek Goenka, founder and CEO of IFA Global.

An Economists at Motilal Oswal Financial Services said that it could help reduce the effectiveness of the US sanctions imposed on Russia. The RBI’s move implies it is “aiming to de-dollarise global trade and the Indian economy,”

 Deepak Shenoy, the founder of Capitalmind feels that the internationalisation of the rupee gets a major kick.  It will help the rupee against the US dollar, because we don’t need so much dollar for our imports if Russia, Iran, UAE, Venezuela etc. were to trade with us in rupee. That will reduce the pressure on the exchange rate.