Whenever we import or export goods and services from other countries, we have to make payments in foreign currency. Since the US$ is the world’s reserve currency and is widely accepted, major transactions are settled in US$. For example, if an Indian buyer trades with a seller from Germany, then the Indian buyer has to convert rupees into US$. The seller from Germany will then convert those $s to Euros. In the above case, both the parties involved have to incur conversion expenses and also bear the risk of foreign exchange rate fluctuation. On 11th July 2022 RBI announced to allow the settlement of global trade in rupees. This mechanism aims to ensure stability and reduce the dependency on US$. So, how does this mechanism work? Unlike the traditional system, where the transactions were settled in $s, they will now be settled in Indian Rupees. For settlement of trade transactions, the authorized dealer banks have to open a special Rupee Vostro account. A Vostro account is a foreign bank’s account with an Indian bank in rupees in India. For example, HSBC holding an account with SBI in the Mumbai branch, denominated in rupees, is called a Rupee Vostro account. This account enables foreign parties to send and receive money from Indian exporters and importers. Moreover, the RBI has also allowed these special Vostro accounts to invest the excess balance in Indian government securities to popularise this new arrangement. ➢ Process of settlement of the transaction: • The bank of the partner country shall approach the authorized dealer bank in India for opening a Special Rupee Vostro account • AD bank will then seek approval from RBI • On the approval from RBI, the Special Rupee Vostro account is opened in the Indian AD bank • In case of imports by an Indian trader, the importer will make payment in rupees which will be credited to the Vostro account of the correspondent bank of the partner country • Similarly, in the case of exports by an Indian trader, he shall be paid in rupees from the balance in the Vostro account of the correspondent bank of the partner country ➢ Benefits:- • Promote Growth: Help in promoting the growth of global trade and also assist in increasing interest of the global trading community in INR • Trade with Sanctioned countries: It will assist to facilitate smooth trade with countries like Russia, Iran, and Sri Lanka. Eg: Due to Russia – Ukraine war, the west is subsequently cutting off Russia from the SWIFT payments system, so this mechanism may seem like an important step to facilitate smooth transactions among countries • Forex fluctuation: This move will also help in reducing the risk of forex fluctuation • Global Acceptance: International trade settlement will contribute to the global acceptance of rupees for international trade transactions • Reduce Trade Deficits: This mechanism will help in narrowing down the trade deficits by reducing the price of commodity imports • This mechanism aims to reduce the demand for foreign exchange, by promoting the rupee settlement of trade flows • Help in reducing India’s dependency on US$ ➢ Disadvantages:- • In case, if the rupee depreciates against the dollar then it impacts the pricing of imported and exported goods, making it more costly • The economy may get impacted by risks such as – high exposure to global shocks, asset bubbles, and exchange rate volatility • Settling the trade transactions in Rupee may upset India’s relationship with the US • It may also indirectly impact the service sector for which we are dependent on developed markets like Europe and US • Since India is highly dependent on imports, likely, the exporting countries may not consider the rupee for settlement purposes until and unless it suits their best interest As of now at least a dozen and a half Vostro accounts have been opened to facilitate the rupee trade with Russia, Sri Lanka, and Mauritius. About 30-35 countries have expressed their interest in understanding better understanding of rupee trade mechanism for possible adoption. Hence there is huge scope to boost the rupee trade. Thank you.
Very well explained
ReplyDeleteReally well written!
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