Introduction
The Reserve Bank of India (RBI) has introduced a mechanism to facilitate international trade settlements in Indian Rupees (INR), aiming to bolster India’s role in global trade and simplify transactions. This arrangement, effective from July 11, 2022, offers an alternative for invoicing, payment, and settlement of trade in INR. Let’s break down the key aspects of this framework as outlined in the RBI’s circular (RBI/FED/2015-16/11 FED Master Direction No. 16/2015-16).
Key Clauses and Explanations
Clause (a): “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place with effect from July 11, 2022 an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.”
Explanation: The RBI has initiated a new arrangement to facilitate the use of INR in international trade, beginning from July 11, 2022. This move aims to enhance India’s global trade presence and simplify the process for exporters and importers.
Clause (b): “The broad framework for cross border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA) is as delineated below:”
Explanation: The framework outlined under FEMA specifies how trade transactions can be conducted in INR, covering aspects like invoicing and settlement procedures.
Clause (i): “All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).”
Explanation: Transactions involving exports and imports can now be invoiced and denominated in INR, providing a standardized approach for dealing in Indian currency.
Clause (ii): “Exchange rate between the currencies of the two trading partner countries may be market determined.”
Explanation: The exchange rate for converting between INR and the trading partner’s currency will be determined by the market, allowing for flexible and real-time conversion rates.
Clause (iii): “The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down in Para c.”
Explanation: Trade transactions under this arrangement will be settled in INR, following the procedures specified in the circular.
Clause (c): “In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.”
Explanation: Authorized Dealer (AD) banks in India can open Rupee Vostro Accounts to facilitate trade settlements with partner countries, allowing for smooth transaction processing.
Clause (i): “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.”
Explanation: Indian importers must make payments in INR to the Special Vostro Accounts of correspondent banks in the partner country, which will then be credited against invoices.
Clause (ii): “Indian exporters undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.”
Explanation: Indian exporters will receive their payments in INR from the Special Vostro Accounts held in the partner country’s correspondent bank.
Clause (d): “The export / import undertaken and settled in this manner shall be subject to usual documentation and reporting requirements.”
Explanation: Transactions settled under this mechanism must adhere to standard documentation and reporting requirements, ensuring transparency and compliance.
Clause (e): “Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism.”
Explanation: Exporters can receive advance payments in INR, provided that available funds are first used to meet existing export obligations. Banks must verify these advances to ensure proper handling.
Clause (f): “‘Set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be allowed.”
Explanation: The mechanism allows for the set-off of export receivables against import payables with the ability to settle any remaining balance through the INR payment system.
Clause (g): “Issue of Bank Guarantee for trade transactions, undertaken through this arrangement, is permitted subject to adherence to provisions of FEMA Notification No. 8, as amended from time to time and the provisions of Master Direction on Guarantees & Co-acceptances.”
Explanation: Bank guarantees for transactions under this arrangement are allowed, provided they comply with FEMA regulations and the Master Direction on Guarantees & Co-acceptances.
Clause (h): “The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement.”
Explanation: Surplus balances in INR can be used for capital and current account transactions, such as investments and project payments, as per mutual agreements.
Clause (i): “Reporting of cross- border transactions need to be done in terms of the extant guidelines under FEMA 1999.”
Explanation: All cross-border transactions must be reported according to the existing FEMA guidelines, ensuring compliance and proper record-keeping.
Clause (j): “The bank of a partner country may approach an AD bank in India for opening of Special INR VOSTRO account. The AD bank will seek approval from the Reserve Bank with details of the arrangement.”
Explanation: Partner country banks can request AD banks in India to open Special INR Vostro Accounts. The AD banks must get RBI approval for these arrangements.
Conclusion
The RBI’s guidelines on international trade settlements in INR aim to streamline and enhance India’s position in global trade. By facilitating transactions in INR, this framework supports exporters, importers, and financial institutions in managing their cross-border trade efficiently.