In view of the increasing interest of the global trading community in the Indian Rupee (INR), Reserve Bank of India (RBI) allowed for a settlement mechanism to carry out transactions in the rupee, with immediate effect. This system will pave the way for facilitating trade with countries currently unable to conduct transactions in US Dollars, Euro, or other dominant foreign exchange currencies.

With the significant world economies facing huge offset due to forex shortages, sanctions by the US and EU in the wake of Russia’s invasion of Ukraine, and a looming sovereign debt crisis, this mechanism will allow for simplifying export and imports.

The new system will facilitate invoicing, payment, and settlement of exports/imports in rupees through Special Rupee Vostro Accounts, i.e., an account of a partner country bank with an authorized Indian bank. Under this new system, the payer's country/bank will make the payment, which shall be credited into the Special Vostro account of the payee.

The process begins with the foreign bank approaching an AD Bank (Authorized Dealer), permitted to open Special INR VOSTRO account under the terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016. The AD banks then must seek approval from RBI to operate under this arrangement. AD Bank has to oversee that the foreign correspondent bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures.

RBI’s circular also stated that the cross-border transactions in INR will be conducted under Foreign Exchange Management Act, 1999 (FEMA) as follows:

• Invoicing: All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR)
• Exchange Rate: Exchange rate between the currencies of the two trading partner countries may be market-determined
• Settlement: The settlement of trade transactions under this arrangement shall occur in INR per the procedure in Para 3 of this circular

Indian importers who use this system for imports will pay in INR against the invoices for the supplies of goods or services from the foreign seller, and that payment will be credited into the Special Vostro account of the correspondent bank of the partner country. The balances in the designated Special Vostro account of the correspondent bank of the partner country would be used to pay Indian exporters who use the mechanism the export revenues in INR.

To comprehend the process better, we can assume an Indian refiner wants to import crude from a UAE company:

• Indian importer transacts for 100 mn INR through the UAE companies’ Vostro account for the shipment of crude oil.
• Now, the UAE Bank, which has that company’s Vostro account, will determine the exchange rate say INR 2 INR, into an Emirati dirham and pays 50 mn dirhams to the UAE exporter into its domestic account.
• The UAE exporter gets 50 mn Emirati dirhams in its account.

In the same way, as mentioned in the guidelines, the exchange will take place at the rate determined by the forex market mechanism.

Advances & Surplus

The advance payments to Indian exports from overseas are permitted under this mechanism provided the banks with concerned vostro accounts ensure that the funds will be used towards payment obligations arising out of already-executed export orders or export payments in the pipeline. In the same way, to ensure safer transactions, RBI noted, “In order to ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro account of its correspondent bank shall, apart from usual due diligence measures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance."

The surplus balance is also permissible towards current and capital transactions following the mutually agreed terms.

This blog has been co-authored by Bhavya Tyagi and Khushi Jain