The Reserve Bank of India (RBI) has announced the establishment of a system for foreign trade settlements in rupees. The directive is effective immediately, and the mechanism is intended to “encourage global trade growth with a focus on exports,” according to the RBI.
The RBI said in a statement on Monday that it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in INR in order to promote the growth of global trade with an emphasis on exports from India and to support the increasing interest of the global trading community in INR.
The RBI’s directive comes as the rupee has fallen to historic lows versus the US currency in recent weeks.
The State Bank of India (SBI) urged last week that the RBI make a “conscious effort to internationalize the rupee.” According to the SBI’s “Research Ecowrap,” “the Russia-Ukraine crisis and the payment difficulties created by it are an excellent chance to insist on export settlement in rupees, commencing with some of the smaller export partners.”
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What do international trade settlements in rupees mean?
Under the Foreign Exchange Management Act of 1999 (FEMA), the RBI has established the basic framework for cross-border commerce transactions in rupees:
- Under this system, all exports and imports may be labeled and invoiced in rupees.
- The exchange rate between the currencies of the two trade partners may be established by the market.
- Under this structure, commercial transactions must be settled in rupees.
Implications for Imports and Exports
Indian importers using this system must pay in rupees, which must be credited into a special Vostro account of the partner country’s correspondent bank, against invoices for the delivery of products or services from the foreign seller or provider.
Indian exporters who use this method must be paid in rupees from the partner country’s Vostro account.
Rupees As An International Currency
A currency is considered “international” if it is widely accepted as a means of exchange for commerce all over the world.
The most widely recognized currency for international commerce is the US dollar, followed by the European euro.
The rupee was formerly accepted in Gulf nations like Qatar, the UAE, Kuwait, and Oman in the 1960s. India also has payment arrangements with Eastern Europe, with the rupee serving as the unit of account in these accords. However, these agreements were discontinued in the mid-1960s.
Difficulty Ahead
The rupee may be converted into an international currency by making it a stable currency that facilitates international trade or by holding it as an asset.
To put it simply, the rupee must become a currency in which assets are kept.
If the rupee becomes an international currency, it will most likely lower India’s trade imbalance. In the global market, the rupee will increase. Other countries may begin to use the rupee as a trade currency.
However, there are obstacles to the rupee’s internationalization as a trade currency.The rupee may be converted into an international currency by making it a stable currency and holding it as an asset.
Simply expressed, the rupee must become a currency in which assets are stored.
It is easier said than done to internationalize the rupee. “Increasing foreign commerce priced in rupees rather than the more popular currency, the US dollar, will be challenging. According to Sandeep Bagla, CEO of Trust Mutual Funds,
“The rupee must be made completely convertible.” Significant flows might cause volatility in the rupee’s value, making monetary policy setting harder for the central bank unless markets are deep with large financial institutions other than the RBI “Bagla said.
It would be challenging in the short term.
India must increase its exports to foreign countries. Furthermore, India must become a producer for the rupee to become a trade currency.
On March 23, Russian President Vladimir Putin said European countries must pay for natural gas imports in rubles, not dollars or euros. Putin could make the demand because Russia supplies 40% of EU natural gas.
