The Central Bank allows Indian Rupee for Global Trade Payments as a consequence of Russia’s invasion of Ukraine and sanctions by the US and the EU.
Rupee Global Trade Payments – Internationalization of Rupee
The value of the Indian Rupee has crashed to a new low against the U.S. dollar in recent weeks. This downfall is a consequence of Russia’s invasion of Ukraine and sanctions by the US and the EU. The State Bank Of India (SBI) put forward a suggestion to RBI that it should internationalize the rupee. The Reserve Bank Of India (RBI) has come up to support the Indian Rupee against the U.S. dollar crash.
As per the RBI’s latest announcement, Indian Rupee will be used for cross-border transactions. RBI has come up with a mechanism for international trade settlements that will promote the growth of global trade with an emphasis on exports.
RBI said in a statement on Monday that “In order 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, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.”
Rupee International Trade Settlement – Key Points
The RBI has given the framework for cross-border trade transactions in rupees under the Foreign Exchange Management Act, 1999 (FEMA)
- RBI is making efforts in arrangements for invoicing, payments and settlements of export and import.
- All export and import transactions will be denominated in INR.
- The exchange rate of currencies of the two countries may be market determined.
Why does RBI allow global trade settlements in Rupees?
RBI sets up a mechanism to settle international trade payments in rupees. But, what is the reason for RBI’s internationalization of the rupee?
Well, the motive behind RBI’s internationalization of the rupee is the sanctions which are imposed by the U.S. on Russia. That is why no country can make trade relations with Russia. And because of these sanctions, many countries are facing inflation.
As a result, the Foreign Exchange Reserve of many countries; such as Sri Lanka, Pakistan, Cambodia, Laos, Vietnam, etc is shrinking.
International trade settlement in Indian rupees
A country’s Foreign Exchange Reserve allows it to make international trades. These trades are generally traded in dollars. But due to the sanction imposed by the U.S., many are unable to export or import.
Russia is an exporter of crude oil, gas, uranium, coal, Machinery, nuclear reactors, boilers, etc to India at a cheap price. But the US has imposed sanctions on trade with Russia in US dollars. But, it is important for India to re-establish trade relations with Russia.
That is why RBI has put Indian Rupee as a substitute for the U.S. dollar in the international market. In simple words, two countries can trade in INR. This will not only be beneficial for India but for other countries as well, that are looking to revive their trade relations with other countries on which the US has imposed Sanctions.
The main focus of RBI is to establish export and import with Russia. It is a welcoming step for counties the U.S. has imposed sanctions on and whose Foreign Exchange Reserve is running out.
America’s reaction to Indian rupees going Internationalization – Rupee Global Trade Payments
What is America’s reaction to Indian rupees going Internationalization?
Till now, there is no reaction from the US. As there is a huge difference in the value of the Indian Rupee to the US dollar.
However, the motive of RBI is to establish a trade relationship with Russia. Also, there is no short-term impact on the value of the dollar.
But in long term, if India becomes a major exporter of products such as weapons and lithium-ion, etc. then it may create an impact on the US dollar.
How Indian Rupee will replace the US dollar in the international market?
The RBI has started a mechanism to begin international trade in Indian Rupee (INR) with an immediate effect. It means we can replace US Dollar with Indian Rupee in the international trade market.
For international trades in INR banks acting as authorized dealers would have to take prior approval from the regulator (RBI) to facilitate transactions.
All the Indian importers who are undertaking imports via this mechanism will make payments through a special account known as the Vostro account of the corresponding bank of the partner’s country.
What is a Vostro account?
A Vostro account is a domestic account that holds domestic currency for a foreign bank account. The term “Vostro” is derived from the Latin word “voster”, meaning “your” A Vostro account is maintained by a foreign bank in India with their corresponding bank.