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Rupee Trade Settlement Mechanism

Posted on December 21, 2022 by admin1  1428

In News

  • Recently, Sri Lanka has agreed to use the Indian rupee (INR) for international trade.

More about the news

  • Indian rupee trade settlement mechanism:
    • The Government of India said it is looking at ways to bring countries that are particularly short of dollars into the ambit of Indian rupee trade settlement mechanism.
  • Sri Lanka’s move:
    • The Central Bank of Sri Lanka (CBSL) said it is waiting for RBI’s (Reserve Bank of India) approval to designate the Indian rupee as foreign currency of Sri Lanka.
    • Sri Lankan banks have reportedly opened a special rupee trading account called – Special Vostro rupee accounts, or SVRA – for trading in INR.
  • Russia’s move:
    • Russia is also expected to be one the first countries to use the Indian rupee trade settlement mechanism.
  • Other countries in the league:
    • Not just Sri Lanka and Russia India’s rupee trade settlement mechanism is also attracting interest from other countries including Tajikistan, Cuba, Luxembourg and Sudan.
    • India is in talks with the UAE and Saudi Arabia to allow settlement of trade in the Indian rupee.
    • Also, the neighbouring island nation has requested RBI to facilitate and promote trade as well as tourism in the SAARC region.

Benefits for Sri Lanka

  • Liquidity support:
    • Severe economic crisis and dollar crunch have been weighing on Sri Lanka for almost a year. 
    • Designating the Indian rupee as a legal currency will provide the island nation with much-needed liquidity support.
  • Holding more amount in physical form:
    • With the opening of Vostro accounts, people in Sri Lanka can now hold USD 10,000 (Rs 8,26,823) in physical form.
  • Substituting Dollar:
    • Also, Sri Lankans and Indians can use Indian rupees instead of US dollars for international transactions between each other.

Indian rupee trade settlement mechanism

  • About:
    • The RBI has announced the setting up of this mechanism to carry out international trade in Indian rupees.
    • The Indian rupee trade settlement mechanism is a means of using the Indian rupee in all international transactions instead of dollars and other big currencies.
    • Special vostro rupee accounts, or SVRA, have been opened by the Indian banks with the banks of Mauritius, Russia, Sri Lanka.
  • Indian Banks’ Association leading awareness:
    • The Finance Ministry of India has also asked the Indian Banks’ Association (IBA) and the Federation of Indian Export Organisations (FIEO) to initiate an awareness campaign to sensitise stakeholders about the rupee trade.
  • For Importers in India:
    • Importers in India undertaking imports through the mechanism will be required to make payment in rupees which must be credited into the Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller or supplier.
  • For exporters of India:
    • In a similar way, exporters of India exporting goods and services through this mechanism must be paid the export proceeds in the Indian currency from the balance in a designated Vostro account of the correspondent bank of the partner country.

Significance of Indian rupee trade settlement mechanism for India

  • Exports and imports in the Indian currency:
    • The mechanism will enable all exports and imports to be denominated and invoiced in the Indian currency.
      • The exchange rate between the trading partners will be settled by the market.
  • Reducing India’s trade deficit:
    • Notably, the rupee becoming an international currency would possibly reduce India’s trade deficit and will help strengthen it in the global market.
  • Disruptions in the market:
    • The kind of disruption due to the Russia-Ukraine war which have been experienced all over, countries are looking at alternative modes of payment & the rupee trade settlement mechanism is the effective way out for India.
  • India’s trade with Russia:
    • This mechanism assumes significance amid a widening trade gap between Russia and India. 
      • While Russia has swiftly become India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the lack of a smooth payment mechanism.
  • UAE & Saudi Arabia: 
    • The UAE is a big market for India, so obviously the traders in the country will benefit from this move. 
    • Similarly, Saudi Arabia is a significant trading partner of India. 
      • However, the problem lies in the fact that we are a net importer from both these countries, so the excess rupee management can be an issue

Way Ahead

  • There are other countries looking into the business. So cost, competitiveness and several factors will play a role. 
  • Indian exporters have a diversified market.

Vostro & Nostro Account

  • A vostro account is a record of money held by a bank or owed to a bank by a third party (an individual, company or bank).
  • The nostro account is a way of keeping track of how much of the bank’s money is being held by the other bank. 

Source: ET

 
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