India central bank to allow rupee settlement system for international trade

MUMBAI (ICIS)–India’s central bank has introduced an Indian rupee settlement system for international trade which is expected to promote global trade growth and support the global trade interest in the rupee.

“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 the Indian rupee (INR), it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR,” the Reserve Bank of India (RBI) said on 11 July.

Under the system, authorized banks will require approval from the RBI to institute the rupee trade settlement mechanism.

Exports and imports under the new arrangement will be denominated and invoiced in rupees and the exchange rate between the currencies of the two trading partner countries will be market- determined.

To settle trade transactions with any country, Indian banks might open special rupee vostro accounts of correspondent bank/s of the partner-country, it added.

A vostro account refers to an account maintained in local currency by a local bank for a foreign bank.

Exporters and importers can use the special vostro account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees, RBI said.

“Indian importers undertaking imports through this mechanism shall make payment in INR [Indian rupee] which shall be credited into the Special Vostro account of the correspondent bank of the partner country,” it added.

Indian exporters should be paid in rupees from the special vostro account of the correspondent bank of the partner country, it said, adding that Indian exporters may also receive advance payment in rupees through this mechanism.

“Before allowing any such receipt of advance payment against exports, Indian banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline,” the RBI notification said.

Any surplus balance in the vostro accounts could be used for capital and current account transactions based on mutual agreements.

The balance in special vostro accounts can also be used for payments for projects and investments, export and import advance flow management, and investment in government securities, the central bank said.

As of 08:00 GMT, the rupee was trading at a record low of Rs79.63 against the US dollar.

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