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The Reserve Bank of India (RBI) on Monday introduced a rupee settlement system for international trade, which could help India promote its exports and facilitate trade with countries under sanction. Mint explains the significance of the central bank’s move.

What does the RBI notification say?

Banks will need RBI approval to use the new system. The Foreign Exchange Management Act (FEMA) states that the final settlement of exports, except for Nepal and Bhutan, can only happen in freely convertible currencies such as the US dollar, euro, yen, and the British pound. Now, the invoicing, payment, and settlement of exports and imports to all countries, if approved by the RBI, can be in the Indian rupee. Under this mechanism, exporters and importers can use a special vostro account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.

What does the change mean for exports?

The mechanism is meant to facilitate trade with countries under sanction. Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway. RBI’s move would ease the situation. Also, several countries including Sri Lanka and some in Africa and Latin America are facing forex  shortage. As such, the new mechanism will help India promote its exports. It will also  help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude. It will also help stabilize rupee.

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Trade winds

Are any sectors excluded from the new system?

It is unclear whether sectors where Western sanctions have been imposed will be covered under this mechanism. However, Russian buyers have reached out to Indian suppliers to make up for shortages arising out of the disruption in supply from European countries, especially for food items, textiles, and beauty products.

What clarity are exporters seeking?

Benefits to exporters in the form of duty drawbacks, export promotion capital goods incentives, and rebate on duties and taxes under different government schemes are available only if the payments or export realizations come in freely convertible currencies such as the US dollar. Therefore, exporters are seeking clarification from the government whether such exports in rupee will also be eligible for benefits. The director general of foreign trade may come up with a clarification on the issue.

Will the move help narrow trade deficit?

The gap between India’s exports and imports widened to record highs in May and June. This puts pressure on the current account deficit, which some economists estimate would nearly double to more than 3% of GDP in FY23. The rupee is at a historic low against the dollar. RBI’s decision may not benefit the external account immediately, but over the medium term, demand for dollars may come down. This is partly because opening of new vostro accounts between banks may take some time.

 

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