The RBI on Monday announced an arrangement whereby Indian and foreign entities can settle cross-border trade payments in rupees. All exports and imports can be denominated and invoiced in rupees, with the exchange rate being market-determined, RBI said. Banks have to get RBI’s approval for the arrangements they put in place.
At the outset, the arrangement appears to have been made to enable a rupee-ruble trade, but the notification nowhere refers to any country or currency. The notification is titled, International Trade Settlements In Indian Rupees and the RBI says the purpose is "to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR."
The notification says foreign banks can open rupee (Vostro) accts in the foreign branches of Indian banks. Indian importers wanting to pay in rupees can pay into this account. Likewise, exporters selling to the same country can be paid rupees from these Vostro accounts. RBI adds that the surplus in these accounts can be used to pay for projects and investments and can be invested in government bonds and treasury bills.
Some bankers were confused about what is new in the notification. A former central banker told CNBC-TV18, that such rupee payment into accounts in foreign branches of Indian banks ( called Vostro accounts) was always permitted. The only difference now appears to be the need for RBI permission.
Prof Anant Narayan, a former banker and currently the professor of finance at SPJIMR said the arrangement may be intended to enable Indian oil refiners to pay for Russian crude in rupees. He pointed to the following statement in the notification: Exchange of messages in a safe, secure, and efficient way may be agreed upon mutually between the banks of partner countries.
"This sentence appears to refer to setting up an alternative to the SWIFT messaging system," he said. Since many Russian banks have been barred from using SWIFT due to sanctions by the US and EU, this sentence gives the impression that the arrangement has been announced with Indo- Russian trade in mind, he explained.
Yet another former central banker guessed that the arrangement may be to help Sri Lanka. The Indian government may arrange a rupee loan to Sri Lanka with the condition that it be used to pay for Indian goods. And the beleaguered country may pay back the rupee loan when normalcy returns.
Besides these two cases, it is difficult to see many countries wanting to take rupees for their exports to India since the rupee isn’t currently accepted internationally like the dollar, euro, pound or yen. Nor is such acceptance likely to take off under current circumstances when the rupee is depreciating nearly every day. An arrangement of this nature may make sense when the rupee is strengthening.
However, others pointed out that in course of time countries in the middle east may agree to take rupees for part of their crude oil sales since they buy several foodstuffs and engineering goods from India and have a large Indian diaspore whom they pay salaries. The Indian government is probably planning for the future to set up a rupee trade area much like China has evolved into a renminbi-trading area.
Nationalistic as this sounds, the reality is rupee has a distance to go before it becomes an internationally accepted currency, where if anything, the dollar’s dominance is only growing. As of now, this arrangement appears useful only for export to Sri Lanka and import from Russia.