Why India Is Finding It Difficult to Trade in Rupee

In July this year, The Reserve Bank of India allowed the invoicing of international trade in Rupees. This was among RBI’s efforts to keep the Indian currency stable and reduce the use of the US Dollar.

RBI relaxed the Vostro account norms allowing surplus funds lying in them to be invested in Indian treasury bills and government bonds. 

However, most banks in India seem to be reluctant to the trade mechanism fearing action by the US authorities.

Why Does The RBI Want To Settle Payments In Rupees?

This move will help reduce India’s dependency on US dollars. Since India is a net importer and the value of the Indian rupee has been declining consistently, RBI’s latest decision to allow international trade in rupees is expected to reduce the pressure on India’s forex reserves.

At a time when the rupee’s value is declining every week against the US dollar, saving dollar outflows becomes even more critical for the RBI.

Why Banks Are Reluctant?

Paying for imports in rupees would help India work around the sanctions imposed on its trade partners, including Russia.

The RBI had earlier also allowed international trade in rupees after Iran faced sanctions a few years ago. Now, with Russia facing US sanctions, RBI has again allowed trading in rupees.

Currently, a large part of bilateral trade between India and Russia is getting settled in the rupee due to sanctions.

"Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller/supplier," it had said.

A Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India. Foreign parties will be able to send and receive money from Indian exporters and importers via these Rupee Vostro accounts.

However, as per reports, banks are reluctant to go ahead with this mechanism and only a few banks have opened Vostro accounts of Russian banks till now. Banks want RBI and the government to give clear guidance to shield them from any action by the US authorities, as per an Economic Times report.

As per the news report, banks may be looking for certain comfort from the government and RBI since there are private banks that are listed on US exchanges.

Amid the impasse, the finance ministry will on Wednesday hold a meeting with all stakeholders, including banks and officials of external affairs and commerce ministries, to discuss ways to promote cross-border trade in rupee instead of the US dollar.

What Is International Trade Settlement In Rupees?

When countries import and export goods and services, they have to make payments in a foreign currency which is the US dollar in most cases. In this arrangement, both the importer and exporter incur the conversion expenses.

With trade settlement in rupees, instead of paying and receiving US dollars, the invoice will be made in Indian rupees via a Vostro account.

The decision is aimed at easing trade with countries such as Sri Lanka and Russia.

The US dollar is stronger than most currencies in the world which makes imports expensive for countries such as Sri Lanka whose economy has come to a halt due to a drastic fall in forex reserves. The fall of Sri Lanka’s currency against the Indian Rupee is lower than that of the US dollar so it would be better for the country to trade in the Indian rupee.