The recently-formulated international trade settlement mechanism in rupees has made a steady start with as many as 118 correspondent banks evincing interest in opening INR Vostro accounts in various Indian banks.

These 118 correspondent banks are primarily from partner countries in CIS, Russia, Sri Lanka and Bangladesh, sources in the banking industry said.

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It maybe recalled that RBI had on July 11 rolled out an international trade settlement mechanism in rupees to enable the invoicing of exports and imports in INR. This was also expected to pave the way for rupee’s emergence as a global currency. The RBI-formulated scheme involves setting up of the INR Vostro accounts in authorised Indian banks by their correspondent banks in partner countries. 

Government’s push

The government is keen to push the mechanism which eventually enables the rupee to emerge as a global currency, a move in sync with India’s aspiration to become a developed country by 2047. For the purpose, a meeting was convened at the Finance Ministry on September 7. In the meeting, bankers were told by the top brass in the main Ministries (Finance, Commerce and External Affairs) to focus on putting in place arrangements under the scheme to enable rupee invoicing of exports and imports so as to help boost internationalisation of the rupee and make sure rupee emerges as a global currency by 2047, when India will celebrate centenary years of its Independence.

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This meeting was attended by the RBI Deputy Governor T Rabi Shankar besides chiefs of public sector banks, sources said.

Banks, on their part, are understood to have raised some concerns about the implementation of this new mechanism and their reluctance to engage with entities forming part of the  existing US sanctions list. However, the emphasis of the government departments was on “further internationalising the rupee” and how increased trade through rupee invoicing could help the local currency emerge as an international currency in the next two decades. 

Banks were asked to promote the rupee invoicing trade settlement scheme with non-sanctioned banks across the world so that the country could have advantage in the long run. “ Wherever we have the opportunity to deal in rupees with non sanctioned correspondent banks, we were advised to go ahead with that. Government is not insisting that banks should go ahead with sanctioned entities. In the long run we want to promote rupee settlement so that we do not have to search and look for hard currency”, sources in banking industry said.

The main objective of this mechanism is to reduce the invoicing of trade in US dollar by shifting it to the INR. Such shifting is expected to make it much easier for Indian exporters and importers to trade with countries facing difficulties in invoicing trade in the US dollar. These include countries like Russia and Iran.

While Indian importers will pay for imports in INR that will then be credited into these accounts, the Indian exporters will receive payments from these accounts.

It is also reckoned that putting in place a transparent and efficient international settlement mechanism in INR will facilitate an increased economic engagement with FTA partner markets. India has already concluded new FTA with Australia and UAE and three more are in the works (Canada, European Union and the United Kingdom).

Indian banks and their foreign counterparts can be prepared to settle trade transactions in the INR by the time the FTAs pick up momentum, said banking experts. This would help accept the INR as a currency of choice for trade among India’s major economic partners and its recognition as a global currency, they added.

Global Dynamics

The RBI formulated settlement mechanism was announced when the Indian currency depreciated sharply against the US dollar. The INR is currently pegged at almost ₹80 to US$1, compared with a value of less than ₹75 about a year ago.

Due to prevailing Western sanctions, traders from countries such as Russia and Iran find it tough to mobilise the US dollar for invoicing exports and imports. An arrangement enabling the pricing of trade in the INR is expected to overcome these difficulties and accelerate their trade with India.

More than 40 per cent of world trade happens in US dollar. If more of India’s external trade gets invoiced in the INR, then the internal demand for the US dollar would decrease, reducing the price of the US dollar against the INR, said trade experts.