RBI’s decision on cross-border trade in rupees: What is the new system, how will it help?

reserve Bank of Indiaof (RBI) to allow the latest decision Rupee Transactions in international trade will help reduce price pressures and strengthen India’s presence in the global market. Here are the decisions taken by the central bank regarding the rupee settlement system and its importance for international trade:
What are the decisions of RBI?

The Reserve Bank of India has made arrangements for invoicing, payment and settlement of exports/imports, allowing invoicing and payments for international trade in rupees.

The central bank said that all exports and imports can be denominated and invoiced in rupees under this arrangement in invoicing. The exchange rate between the currencies of the two trading partner countries would be market determined, and trade transactions would be settled in rupees under this arrangement.

It states that authorized dealer banks for settlement of business transactions with any country India Partners can open Special Rupee Vostro Accounts with the correspondent bank/s of the trading country.

Banks will need RBI approval from the RBI’s foreign exchange department to use the new system.
What is a Vostro Account?

A Vostro account is an account maintained by one bank on behalf of another bank. According to Investopedia, these accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as a custodian for or manages the foreign counterpart’s account.

As per the latest RBI decisions, “Indian importers importing through this mechanism shall make payment in rupees, which shall be credited to the special Vostro account of the correspondent bank of the partner country against the invoice for supply of goods or services to the foreigners. Vendor/supplier.”

It said that Indian exporters exporting goods and services through this mechanism would also be paid export proceeds in rupees from the balance in the designated special Vostro account of the correspondent bank of the partner country.
What will be the effect of RBI’s latest steps?

To promote the growth of global trade with emphasis on exports from India and support the growing interest of the global trading community in the rupee, the central bank said.

This would potentially facilitate greater bilateral trade with Russia, which is facing Western sanctions and almost cut off from standard cross-border payment platforms.

Pradeep Multani, President, PHDCCI said, “RBI’s decision to allow rupee transactions in international trade will help ease price pressures and strengthen India’s presence in the international market.” He said that the rupee transaction will enhance the business with better transactions with its business partners. As a strong economy, India is an attractive destination for trade and investment for many economies.

“Internationalization of the rupee will find better complementarity with countries that are willing to enhance the trade trajectory with India,” Multani said.

Experts also say that RBI’s move may help reduce the country’s trade deficit as India can now increase the share of Russian oil purchases at a discounted price.

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