RBI announces mechanism for settling International trades in rupee

Industry Insights
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Considering the fact that we are seeing a massive depreciation in rupee and that USDINR is quoting at all time highs, RBI is taking various steps :

RBI has recently announced certain measures to attract foreign investments and arrest the fall in rupee :

The effect of it lasted for 2 days as rupee again touched its all time lows against dollar.

The second one, announced today probably will have a major effect in the medium run.

RBI’s announcement for settling international trades in rupee.

The broad framework for cross border trade transactions in INR under Foreign
Exchange Management Act, 1999 (FEMA) is as delineated below:

  • (a) Invoicing: All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).

  • (b) Exchange Rate: Exchange rate between the currencies of the two trading partner countries may be market determined.

  • (c) Settlement: The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down

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. In order to allow settlement of international trade transactions through this arrangement, it has been decided that:

(a) 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.

(b) 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.

Here’s the link to the full circular from RBI :

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDCN1083AC50D954814429AC4D404A9A73DDD1.PDF

Will we finally see Rupee playing bigger role than its current status ?

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Importers will be happy to lock in a net inr cif price as they all sell to domestic wholesalers in inr. ( after custom duty/igst etc)
But exporters will accept ₹ only as a last option to save the deal.

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The first option of RBI is mainly to attract foreign inflows from NRI customers. This will take time as banks needs to first increase their FCNR USD deposits rate. SBI in the last few days increased their rates. NRI will now find this route of depositing in FCNR deposits attractive, but this will take time. Other Banks must be in the process of increasing their FCNR deposits rates and NRE deposits rates. Only once this is done and properly advertised, will the fund flow start trickling in.

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NRI diaspora is the biggest in world in remittances. But $£€ fd / sb rates are a joke. Only way to entice the NRI to remit hard currency & convert to ₹ is a huge premium over domestic ₹ fd rates. Rbi can do a 90 day campaign for 1-2-3 year fd rates offer say 2% higher ( like govt subsidy in SCSS fd rates & small savings rates) . Bold action will be RBI advertising in wall street Journal full pageadvt appealing to global desi diasporas. That will get global media coverage.
All indians all over the world will yake notice. All indian consulates all over the world has indians database who are living in that country. Instead of working 2 hours a day, consulates can a do a email campaign. These are all too much to expect from govt departments☺

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Frankly wouldn’t work at all because the real main reason of weakening rupee is because of big rise in the price of crude oil and the rising demand of crude oil. We are the 3rd largest importer and consumer of crude oil after china and our trade defecits are wide. As private vehicle ownership increases our crude oil consumption has increased only

One thing the govt can do here is one go to gold standard or partially adopt dollar as they do in South America.

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One more article

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It’s time for the Indian Rupee to go global! I think it is a brilliant move. If done perfectly, the Indian Rupee will establish itself as a strong currency.

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I hope this policy shows the world our true power. Well, the INR cannot dethrone the USD, but it might have parity with other top currencies of the world in the coming years.