RBI Notifications

RBI sets up system to settle International Trade in Rupees

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Rupee Settlement System for International Trade

Mains level : Read the attached story

RBI has decided to put in place an additional arrangement of international trade for invoicing, payment, and settlement of exports / imports in INR.

Rupee Settlement System for International Trade

  • Banks acting as authorised dealers for such transactions would have to take prior approval from the regulator to facilitate this.
  • All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
  • Exchange rate between the currencies of the two trading partner countries may be market determined.
  • Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
  • These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
  • Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

Nostro and Vostro Accounts

  • Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank’s money on deposit.
  • They are used to differentiate between the two sets of accounting records kept by each bank.
  • Nostro comes from the Latin word for “ours,” as in “our money that is on deposit at your bank.”
  • Vostro means “yours,” as in “your money that is on deposit at our bank.”

Why such move?

  • The rupee is at a historic low against the dollar.
  • 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.
  • As a result of the trade facilitation mechanism, we see easing of payment issues with Russia.
  • The move would also reduce the risk of forex fluctuation specially looking at the Euro-rupee parity.
  • We see this as a first step towards 100% convertibility of rupee.
  • It will also help stabilize rupee.

What does the change mean for exports?

  • 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.

Will the move help narrow trade deficit?

  • The gap between India’s exports and imports widened to record highs.
  • This puts pressure on the current account deficit, which some economists estimate would nearly double to more than 3% of GDP in FY23.
  • 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.

Back2Basics: Currency Convertibility

  • Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges.
  • It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country.
  • Currencies that aren’t fully convertible, on the other hand, are generally difficult to convert into other currencies.
  • Having a convertible currency allows a government to pay for goods and services in a currency that may not be the buyer’s own.

Convertibility of Rupee

  • In order to face the serious current account deficit in the balance of payments, the Government of India introduced the partial convertibility of rupee from March 1, 1992.
  • This was an inevitable move for the expeditious integration of Indian economy with that of the world.
  • Under this system, 60 per cent of the exchange earnings were convertible in rupees at market-determined exchange rate and the remaining 40 per cent were at the officially determined exchange rate.
  • Current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes.
  • Capital account convertibility refers to a similar liberalization of a country’s capital transactions such as loans and investment, both short term and long term.

 

A bit difficult, but pls take an effort to try this PYQ from CSP 2020:

If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

  1. Not depending on short-term foreign borrowings
  2. Opening up to more foreign banks
  3. Maintaining full capital account convertibility

Select the correct answer using the code given below:

(a) 1 only

(b) 1 and 2 only

(c) 2 only

(d) 1, 2 and 3

 

Post your answers here. Detailed explanation will be provided.
10
Please leave a feedback on thisx

 

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abhishek anand
abhishek anand
2 months ago
Post your answers here. Detailed explanation will be provided." Read more »

a

AMRITA RAJ
AMRITA RAJ
2 months ago
Reply to  abhishek anand

Only one

Vikram Gupta
Vikram Gupta
2 months ago
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(b)

jyoti yadav
jyoti yadav
2 months ago

b

Geetanjali Basumatary
Geetanjali Basumatary
2 months ago
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1

Neethi Varman
Neethi Varman
2 months ago
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C

Kshitij Khandare
Kshitij Khandare
2 months ago
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A

Y L
Y L
2 months ago
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a

Narendra Awana
Narendra Awana
2 months ago
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a

Priyal Jangid
Priyal Jangid
2 months ago
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a

Garima yadav
Garima yadav
1 month ago
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2

Praveena Meesa
Praveena Meesa
1 month ago
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C