InvestorQ : What are the implications of the RBI permitting rupee denominated trade with other trading partners?
Niti Shenoi made post

What are the implications of the RBI permitting rupee denominated trade with other trading partners?

ishika Banerjee answered.
1 month ago

When Ultratech Cements bought coal from Russia last month and paid for the same in Chinese Yuan, there was a sense of concern in government circles. After all, that was necessitated after Russia had been cut off from the dollar payment market and India still did not have a rupee rouble trading arrangement with Russia in place. However, the transaction in Yuan did not make the RBI and the government too comfortable and the speed for a solution gathered momentum post the transaction. Now detailed rupee trade rules are out.

Here is what you need to know about the new rupee trade arrangement announced

· This announcement coincides with the rupee touching a low of 79.63/$ threatening to breach the 80/$ mark.

· This move is likely to encourage the trade between India and Russia in rupees. In addition, this is also likely to help trade with Sri Lanka, which is reeling under a severe crisis as well as Iran which is still under the US sanctions.

· This effectively puts in place an additional parallel arrangement for invoicing, payment, and settlement of exports and imports in Indian Rupee. While the idea is to check dollar dominance, it also intends to defend the rupee better amidst the sharp fall.

· To begin with, all cross-border exports and imports covered under the FEMA (Foreign Exchange Management Act) can be denominated and invoiced in Indian rupees. The exchange rate between currencies of trading partners will be market determined.

· The process is that the bank authorised to deal in foreign exchange in India (AD) will be permitted to open a Special Rupee Vostro Accounts of the correspondent bank of the trading partner nation. All payments and receipts can be routed through this account.

· Under this scheme, Indian importers would be permitted to pay in Rupees and it would be credited into the Special Vostro account of the correspondent bank. This credit will be only given against the invoices for supply of goods from overseas supplier. Indian exporters opting for this route, can credit export proceeds to Special Vostro accounts.

· The balances standing in the Special Vostro Accounts can be utilized for project payments, investments, advances for export or import and to invest in G-Secs or treasury bills.

· The success may be more with Russia, Iran and Sri Lanka, not so much with other countries, considering the INR is still not a hard currency. But, it will surely reduce the demand for foreign exchange and avoid importer pressure like we get to see from the oil marketing companies. It is not down to the execution.