Settlement in INR

International Rupee Settlement in indian Rupees (INR)

NEWS: On 6th July 2022, Reserve Bank of India (RBI) announced measures to attract forex inflows into NRE/FCNR accounts of NRIs,  as fresh ECB for Indian corporates and FPI investments in short term instruments like CPs/Bonds having original maturity of 1 year. Now, the regulator has issued new guidelines permitting banks to open Special Rupee Vostro accounts for correspondent banks of the partner trading country. The purpose of the guidelines is seen as another attempt to preserve the precious dollar reserves, in attack in recent months, due to hike in Fed rates and jump in crude oil prices, etc.

 Brief : The fresh guidelines  include invoicing of exports/imports in INR, market determined exchange rate with the relevant currency of the trading partner country  and opening of special Rupee Vostro accounts of correspondent banks with designated AD Bank in India for settlement of trade transactions in INR. Special safeguards have been prescribed for receiving advances against exports in INR from the Special Rupee Vostro accounts opened. Indian Banks are given the responsibility to ensure that the claim of the exporter is verified with instructions of the overseas importer, before releasing the advance money from the special rupee vostro accounts maintained with them (Normally, exporters get the advance payment directly into their accounts from the importer without interference from the banks.)

 Who may open the Special Rupee Vostro account: Banks situated in countries, which have huge trade surplus with India and which do not prefer dollar as a settlement currency, may show willingness in opening the above accounts with ADs in India

 Covenants for success:

1. Since the trading country do not import from India to the extent of its exports, the special rupee Vostro is likely to have liquid funds up to the trade surplus level. The correspondent bank has to use it effectively in India only. It is therefore essential that the business/investing community looks upon India as an attractive destination for investing in new projects/in govt. securities/T. Bills, etc. Then only, the trading partner country may look at opening Rupee Vostro accounts as a beneficial option.

2. The guidelines require all exports and imports under this arrangement to be denominated and invoiced in INR. Invoicing in INR may be preferred by exporters in India and overseas exporters to India, only when INR is relatively stable against the relevant currencies. As the non-dollar currencies fluctuate against dollar in varying proportions, exporters from both sides may not prefer invoicing in INR. Hence RBI may think of permitting transactions, which are invoiced in dollar/other permitted currencies, but settled in INR through the Special Rupee Vostro Accounts at market determined exchange rates. If 'sanctions' come in the way of settling ‘dollar/other permitted currencies’ invoiced trades to be settled in INR, invoicing in trade partner currency, but settlement in INR through Special Rupee Vostro accounts with ADs may be given as another choice.

Regards

V. Viswanathan

13th July 2022.

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