Reserve Bank of India (RBI) allowed invoicing and payments of international trades in rupee.
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RBI allowed invoicing and payments for international trades in rupees instead of US Dollars, facilitating greater bilateral business with Russia, which is facing a wide range of American and European sanctions and is cut off from standard cross border payment platforms (SWIFT). This aims to promote “the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR,” RBI said.
The decision by RBI to allow international trade in rupees is to make easy trading with countries like Sri Lanka, which is running low on forex reserves, and Russia, which cannot make payments in US dollars due to sanctions.
How International Trade Settled ?
When countries import and export goods and services, they have to agree on a common currency to make payments. Since the US Dollar is the world’s reserve currency, most of these payments are done in US dollars.
For example, if an Indian traders wants to buy some goods or services from a UK based seller. First, the Indian buyer has to convert his rupees into US dollars. The seller will receive those dollars, then seller from UK will convert these dollars into pounds. Both parties involved, have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations.
That's why RBI allowed trade settlement in rupees instead of US dollars, the invoice and payments will be made in Indian rupees.
Rupee Payment Mechanism and Vostro | Nostro Accounts
A Rupee Vostro account is a foreign bank’s account with an Indian bank in Indian currency, rupees, in India to send and receive payments in rupees.
For example, a foreign bank like HSBC holds an account with the State Bank of India (SBI) in India, is called a Rupee Vostro account.
Foreign importers and exporters will send or receive money from Indian importers and exporters via Rupee Vostro accounts.
On the other hand, a Nostro account is an Indian bank’s account with a foreign bank in foreign currency in the foreign country. For example, State Bank of India (SBI) holds an account with HSBC in UK to send and receive payments in pounds.
Benefits of Trade in Rupee
This move will reduce India’s dependency on US dollars.
Its easy to trade with countries like Sri Lanka, having low forex reserves, and Russia, which cannot make payments in US dollars due to sanctions.
Trading in rupees promotes growth of global trade and supports the interest of the global trading community in rupees.
This move of RBI would also reduce the risk of forex fluctuation.
Trades in rupees aims to reduce demand of foreign exchange, by promoting rupee settlement of trade flows.
India runs a trade deficit means India's imports are greater than its exports, therefore, settling trades in rupees will also reduce outflow of dollar.
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