Govts push for international trade in rupee why and how

The finance ministry was scheduled to meet stakeholders including banks and ministries of foreign affairs and commerce to discuss ways to promote international trade in rupees instead of the US dollar.

The meeting will be attended by representatives of Reserve Bank of India, Bankers Association of India, Banks’ Representative Organization and industry bodies.

On July 11 this year, RBI issued a circular. It said it had “decided to make additional arrangements in Indian rupees for invoicing, payments and exports and imports”.
It further said, “To promote the growth of global trade with emphasis on exports from India and to support the growing interest of the global trading community in the Indian Rupee”.

While the move to allow trade settlements between India and other countries in the rupee was seen as primarily benefiting trade with Russia, it was expected to help curb dollar outflows and “to a very limited extent” limit the depreciation of the rupee.

Banks in India open Vostro accounts to settle trade transactions with any country. Indian importers can pay their imports in Indian Rupees into these accounts.
This income from imports can be used to pay Indian exporters in Indian rupees.

A Vostro account is an account held by a bank on behalf of another bank – for example, the HSBC Vostro account is held by SBI in India.

Currently, with exceptions like Nepal and Bhutan, a company’s exports or imports are always in foreign currency.
Therefore, in the case of imports, the Indian company has to pay in foreign currency, which is mainly dollars, but can also be pounds, euros or yen.

An Indian company receives payment in foreign currency during export and in most cases the company converts that foreign currency into rupees as it requires rupees for its requirements.

Expected use

Although the RBI order did not say so, the provision was expected to be primarily applied to Russia.
“Economic sanctions have been imposed on Russia since the war in Ukraine, and the country has been blocked from the SWIFT system (the system used by banks to make payments in foreign currency).
It means no need to pay in foreign currency and this arrangement will help Russia and India,” Madan Sapnavis, chief economist at Bank of Baroda, told The Indian Express.

Sapnavis said the arrangement is unlikely to be extended to other countries. “We may like it, but others may not accept it because they need foreign currency to pay for their own imports,” he said.
Sri Lanka and we may prefer to pay in dollars or any other foreign currency.

Depreciation of rupee

The arrangement is not expected to help stem the rupee’s fall to any significant extent.
It is noteworthy that the value of the rupee is depreciating like all other world currencies against the dollar.

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