It is reported that on July 11, the Reserve Bank of India (RBI) issued a notice for international trade settlement in Indian Rupees (INR). It has been decided to implement an additional mechanism for invoicing, payment and settlement of import and export goods in Indian rupees with immediate effect, the notification said.
The notice stated that under this mechanism, all imports and exports can be denominated and invoiced in rupees (INR), and the currency exchange rates between trading partner countries are determined by the market.
The move comes as European and American countries have imposed sanctions on countries such as Russia and Iran, making bilateral trade and payment settlements between India and these countries difficult, and the Indian currency is facing increasing pressure. This has left Indian companies in dire need of alternative payment methods for imports.
Barclays chief India economist Rahul Bajoria said: “Amid continued weakness in the rupee, the RBI’s announcement of this facility appears aimed at reducing the need for foreign exchange by facilitating rupee-settled trade flows.”
The overall framework of the Reserve Bank of India for cross-border trade transactions in Indian rupees is as follows:
Invoice
Under this new international trade mechanism, all import and export operations can be denominated and invoiced in Indian rupees.
Exchange rate
Without mentioning the name of the country, the exchange rate between the currencies of two trading partners will be determined by the market.
Billing
As notified by the Reserve Bank of India, settlement of trade transactions under this facility will be conducted in Indian rupees in accordance with the following procedures.
1. For settlement of trade transactions with any country, authorized dealer (AD) banks in India must open Special Rupee Vostro Accounts (Special Rupee Vostro Accounts) at the agent bank in the trading partner country.
2. Indian importers importing through this mechanism shall be paid in Indian rupees based on invoices for goods or services provided by overseas sellers or suppliers, and the amount shall be credited to the special Vostro account of the agent bank in the partner country.
3. Indian exporters exporting goods and services through this mechanism shall pay the export proceeds in Indian rupees from the balance of the special Vostro account designated by the agent bank in the partner country.
Documentation requirements for the new international trade payment mechanism
There are no changes to the documentation requirements for imports and exports conducted and settled under this new mechanism. Letters of credit and other trade-related documents can be mutually decided by banks in trading partner countries under the overall framework of the Uniform Customs and Practice for Documentary Credits (UCPDC) and Incoterms. Reporting of these cross-border transactions must be done in accordance with existing guidelines under the Foreign Exchange Management Act, 1999 (FEMA).
Export advance payment
Once the relevant Indian banks allow it, Indian exporters can receive export advances in Indian rupees from overseas importers through the above-mentioned rupee payment mechanism. Indian banks shall ensure that funds available in these accounts are first utilized against payment obligations arising from executed export orders/ongoing export payments before allowing receipt of any such export advances.
To ensure that advance payment is released only on the instructions of the overseas importer, in addition to usual due diligence measures, Indian banks maintaining special Vostro accounts with their correspondent banks should verify the exporter’s claim against the notification of the correspondent bank before releasing the advance payment.
The grant of such license is subject to the conditions outlined in the General Export of Goods and Services Directive 2016. The same rules apply to the “set-off” of export receivables against import payables from the same overseas buyer and supplier.
Use of surplus balance
The international rupee surplus balance in the special Vostro account can be used for the following purposes:
1. Payment for projects and investments;
2. Import and export prepayment process management;
3. Investment in government treasury bills, government securities, etc. according to existing guidelines and prescribed limits, subject to FEMA and similar legal provisions.
Establish an approval process for the mechanism
All AD banks adopting this mechanism must first obtain prior approval from the Mumbai Central Office of the Foreign Exchange Department of the Reserve Bank of India.
Banks in partner countries can contact AD Bank in India to open special Rupee Vostro accounts. AD Bank will seek approval from the Reserve Bank of India along with details of the arrangement. AD banks maintaining special Vostro accounts should ensure that the correspondent bank is not a country or jurisdiction that calls for response measures in the Financial Action Task Force’s (FATF) latest public statement on high-risk and uncooperative jurisdictions.
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