Balance of Payments

Economic Affairs UPSC Civil Services Examination (General Studies)

Title

45:30

8 of 24 completed

5 of 15 completed

38 of 100 completed

8 of 20 completed

Indian Economy - Understanding the basics of Indian economic system

Global Trade in Local Currency

Context: The Reserve Bank of India has announced an arrangement for the country's traders to settle imports and exports in rupees.

This move is aimed at promoting growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in Indian Rupee. This will also facilitate trade with countries like Russia which are facing sanctions.
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. India imports more than it exports so the country will also save foreign currency under the new arrangement.

Will boost Indian export and currency: The move would promote global trade growth with an emphasis on exports from India (e.g. Tea export) and will support the increasing interest of the global trading community in the domestic currency.
Expedite transactions with sanctions-hit Russia: India’s trade with Russia stood at $13.1 billion in 2021-22.
Final settlement in Indian Rupee: Under the existing provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. Now, if RBI approves, the final settlement to all countries can be in the Indian rupee.
Save foreign currency and reduce trade deficit: Since India imports more than it exports. It will enhance forex inflows and as a step to stabilize the rupee.
Will help build better ties with Russia: The opening of the trade settlement route shows Russia’s importance as India’s trading partner in the face of increasing pressure from Western countries to cut links.
Can be used for other neighbouring countries as well: Several countries including Iran, Sri Lanka and some in Africa and Latin America are facing forex shortages. As such, the new mechanism will help India promote its exports in these countries.

According to the central bank, AD (authorised dealer) 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 banks of the partner trading country. A vostro account is an account a correspondent bank holds on behalf of another bank.
Indian importers undertaking imports through this mechanism shall make payment in INR which should be credited into the special vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier,”

Russian banks will have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited.
Indian importers will make payments in rupees, to be credited to the Vostro account of the correspondent bank of the partner country.
Indian exporters will be paid the export proceeds in rupees from the balances in the designated special vostro account of the correspondent bank of the partner country,”

A similar Vostro account set up for the purpose of trade with Iran had run dry as India was stopped from sourcing oil from Iran amid US sanctions.
Exporters had said the payment problem in the Iran market restricted them from filling the space left vacant by Sri Lanka, which is in the middle of a severe financial crisis.
Western countries might put pressure on India to not allow any such mechanism.