Trade invoicing, payment, and settlement of trade = ?

RBI Circular RBI/2022-2023/90 A.P. (DIR Series) Circular No.10

Why International trade Settlement in Rupees?

When countries import and export goods and services, they have to make payments in a foreign currency. Since the US Dollar is the world’s reserve currency, most of these transactions are entered into US dollars.

If an Indian buyer enters into a transaction with a seller from Germany, the Indian buyer has to first convert his rupees into US dollars. The seller will receive those dollars which will then be converted into Euros.

Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations

This is where trade settlement in rupees comes in – instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.

Now, As per the economic situation prevalent globally, and the continuous weakening of the Indian Rupee (INR), the Reserve Bank of India (RBI) vide Circular dated 11 July 2022 has allowed international settlement of trade in INR for export and/or import of goods and services.

This step aims to promote the growth of global trade with an emphasis on exports from India and to support the increasing interest of the global trading community in INR.

Important to note: This is an additional arrangement for invoicing payment, and settlement of exports/imports and would co-exist with the current practice of trade settlement in freely convertible foreign exchange (FOREX).

An authorized bank would require approval from the RBI to implement this arrangement.

Some of the salient features of the said Circular include:

• All exports and imports under this arrangement may be denominated and invoiced in INR
• Exchange rates would be market determined
• Settlement of trade transactions can take place in INR
• Indian banks will be permitted to open a Special Vostro Account (SV Account) of the correspondent bank of the trading country
• Advance against export may also be received in INR
• Set-off of export receivables shall also be permitted subject to existing RBI master directions
• In the case of imports, payments in INR can be credited into the SV Account of the correspondent bank, against the invoices for the supply of goods or services.
• In the case of exports, the Indian exporter is paid from the balance available in the SV account of the correspondent bank of the partner country.

After this step, many countries have now expressed interest in settling bilateral trade with India in rupees.

Considering this Change, The Directorate General of Foreign Trade (DGFT) on September 16, 2022, inserted paragraph 2.54(d) under the Foreign Trade Policy (FTP) to permit invoicing, payment, and settlement of exports and imports in the Indian rupee in sync with RBI's circular dated July 11, 2022. This shall come into force with immediate effect.

However, there must be more clarity on the Export Benefits also.

Now, if you are interested, you need to follow the below-mentioned steps:-

• The bank of a partner country (with which?import/export?has to be done) may approach the authorized dealer (AD) bank in India for the opening of a Special INR VOSTRO account.
• The AD bank will seek approval from the RBI with details of the arrangement to go forward.
• 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.
• Indian traders undertaking imports via this mechanism shall make payments in rupees which shall be credited into the Special Vostro account of the correspondent bank of the partner country.
• Indian exporters shipping goods and services under this mechanism shall be paid export proceeds in rupees from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

2 Cents

1. This is quite a bold step for making the Indian Currency strengthened.
2. With the passage of time, even capital accounts transactions may be permitted to make INR truly convertible.
3. This step will also help in reducing transaction costs as businesses will save commissions paid to overseas correspondence banks.

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