15 July 2022
RBI introduces International Trade Settlement in INR to promote growth in global trade

Nexdigm's Inferences
The Reserve Bank of India (RBI), vide its Circular No. 10, RBI/2022-2023/90 dated 11 July 2022, has introduced International Trade Settlement in Indian Rupees (INR) with respect to invoicing, exchange rate, and settlement of cross-border trade transactions, which shall come into force with immediate effect.

Highlights of the International Trade Settlement in Indian Rupees (INR) Circular
To foster global trade and to support the growing interest of the global trading community in INR, the RBI has put in place an additional arrangement for the invoicing, payment, and settlement of exports and imports in INR.

The proposed arrangement is as follows:
  • Invoicing: Under this arrangement, all exports and imports may be denominated and invoiced in INR.
  • Exchange Rate: Exchange rate between the currencies of the two trading partner countries may be market-determined.
  • Settlement: In accordance with the circular, trade transactions under this arrangement shall be settled in INR.
Settlement Procedure
For the purpose of facilitation of settlement of international trade transactions, Authorised Dealer (AD) banks in India have been permitted to open "Rupee Vostro Accounts." For this, AD bank in India may open "Special Rupee Vostro Accounts" of correspondent bank/s of the partner trading country.

Arrangement for Importers
Payments for imported goods or services by Indian importers via this mechanism must be made in INR, which shall be credited into the Special Vostro account of the correspondent bank of the partner country.

Arrangement for Exporters
This mechanism will allow Indian exporters to receive the export proceeds in INR from the balances in the designated Special Vostro account of their partner country's correspondent bank.

Any transactions carried out under the said mechanism shall require usual reporting, like a Letter of Credit (LC) and agreed documents as per the framework prescribed under Uniform Customs and Practice for Documentary Credits (UCPDC) and Incoterms (International Commercial Term).

Advance against exports
Advance payments by exporters from overseas importers may be received in INR via the above Rupee Payment Mechanism. Indian Banks should ensure that funds available in these accounts are used first for payment obligations arising from already executed export orders. The Indian bank holding the Special Vostro account of its correspondent bank must verify the exporter's claim before releasing the advance.

Provision for 'Set-off' of export receivables
The Rupee Payment Mechanism may be used to make/receive payments of the balance of export receivables/import payables, if any, by the same overseas buyer and supplier subject to the specified conditions.

Bank Guarantee for trade transactions, if any, undertaken through this arrangement is permitted subject to adherence to provisions of FEMA Act and the provisions of Master Direction on Guarantees & Co-acceptances.

Use of Surplus Balance
The balance in Special Vostro Accounts, if any, may be used for:
  • Payments for projects and investments.
  • Export/Import advance flow management.
  • Investment in government T-Bills, government securities, etc., subject to FEMA and similar statutory provisions.
RBI Approval Process
The bank of a partner country may approach an AD bank in India with details of the arrangement for opening a Special INR VOSTRO account, subject to the approval of the Reserve Bank. The corresponding bank shall not be from a country or jurisdiction in the updated Financial Action Task Force (FATF) Public Statement on High Risk and Non-Co-operative Jurisdictions on which FATF has called for countermeasures.

Furthermore, reporting of cross-border transactions needs to be done in terms of the extant guidelines under FEMA 1999.

Before implementing this mechanism, AD banks shall obtain approval from the Foreign Exchange Department of RBI, Central Office in Mumbai.
Our Comments
This circular is brought in with the view:
  1. To facilitate transactions in Indian Rupee to strengthen the INR against the USD.
  2. To make INR a more tradable and globally accepted currency.
  3. To reduce India's Forex deficit.
As a whole, this seems to be a well-timed move, which will prevent the slide in the domestic currency, reduce the impact of dollar outflows through imports, and preserve foreign reserves in the process.

The circular link is given for your ready reference.
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