On 11th July 2022, the Central Bank of India Reserve Bank of India allowed the international trade settlement with Indian Rupee to promote global trade with the focus on exports from India. What is this new trade settlement, and what are its benefits and concerns. Let’s discuss this in detail in this article as we move ahead.
New International Trade Settlement:
- Earlier the trade executed either import or export was mostly done in that denomination which is working at that particular country or universally accepted- US Dollar and not in Indian Currencies.
- Now, RBI has made a system where Invoicing will be done in Indian Reports in the case of Imports/Exports.
- The rate will be decided at the value of the Indian Rupee in the market.
- This system will be governed under Foreign Exchange Management Act, 1999.
- Any individual or a company who is willing to send/receive from a foreign country will go to banks (called Authorised Banks). Further Authorised Banks take permission from the Reserve Bank of India (RBI) for such transactions. Banks open a special account or VOSTRO account.
- VOSTRO Account is an account where the foreign bank opens an account with a domestic country bank in the domestic currency terms. For Example, CITI Bank (US Branch) is opening a VOSTRO account with SBI Bank in India).
- VOSTRO account will facilitate the import transactions.
- For Exports, advances can be utilized for the transaction to carry out the transaction in foreign currency only. The surplus amount will be utilized on Payments for projects and investments, flow management of exports and imports, and investment in government securities.
- This new Trade Settlement is an additional arrangement besides the ongoing trade settlements.
Why this System was Needed?
- To promote global trade
- Interest in Global Trading will increase in Indian INR terms due to payments done in Indian currency.
Benefits of International Trade Settlement with Indian Rupee:
- Preservation of Foreign Exchange Reserves as payment done in domestic currency will preserve the foreign currency.
- Increase demand for the Indian Rupee which will lead to handling of slippage of Indian Rupees against the Dollar as well as strengthening against the same.
- Setup different financial telecommunication with countries that have better relations with India.
- Strengthening Foreign Policy
- Increase in Trade Volumes
Concerns about International Trade Settlement with the Indian Rupee:
- The demand for the Indian Rupee: This settlement will only be successful when there is a demand for the Indian Rupee from foreign countries like the US Dollar currently.
- Relationship with Western Countries: India is having a good relationship with Russia, with whom many modern and developed countries have put sanctions. The ongoing relationship with Russia might impact the success of this settlement to some extent.
The New International Trade Settlement with Indian Rupee is the new adjustment to the existing trade settlement for imports and exports. This adjustment is expected to increase the interest of the Indian Rupee in global trade and also emphasize export. Also, this step can be considered the first step toward the internationalization of the rupee in the global market. And, Hence it will be important to see how this settlement succeeds ahead and whether will it be able to achieve all the factors which the system intends.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.