Rupee Settlement For International Trade: What Changes? #BQDebates

With the Reserve Bank of India announcing an additional mechanism for invoicing, payment, and settlement of exports and imports in Indian rupees, currency market and macroeconomic exports see the measures easing India’s hard currency outflow substantially, and overall reduce the demand for foreign exchange further.

'Currency Outflow To Ease, Watch Geopolitical Fallout'

- Ananth Narayan, Associate Professor – Finance at S. P. Jain Institute of Management and Research

While today’s circular allows for a more generalised internationalisation of the Indian Rupee, realistically, the immediate takers right now are likely countries that wish to move out of U.S.Dollar / G7 currency settlements or fear sanctions. Russia naturally comes to mind.

The language also seems to envisage and allow for alternative financial messaging to SWIFT, if so needed.

If India does start to convert trade with Russia under this route, it can potentially pay for a chunk of its oil imports in rupees. The trade balance—in Russia’s favour—will stay as rupee balances of Russian banks with India’s banking system, to be invested in Indian assets (including government securities). This would ease India’s hard currency outflow substantially.

Of course, given the developments between Russia and the West with respect to gas and sanctions, there will likely be substantial geopolitical ramifications of any formalised Rouble-Rupee trade.

'Forex Demand To Fall Further'

- Rahul Bajoria, Managing Director and Chief India Economist at Barclays

In an ongoing series of steps aimed at stabilising the rupee, the RBI today announced a number of measures aimed at increasing the use of the Indian rupee for the settlement of trade flows, which appear to be aimed primarily at reducing the demand for foreign exchange for settlement purposes for current account related trade flows. The new steps allow Indian exporters and importers to use special Vostro accounts denominated in Indian Rupee for purpose of settling their rupee-denominated trade invoices. This step can be particularly useful for neighbouring countries, and also those countries willing to use the rupee as a base currency for trade diversification in their settlement rules.

The RBI has also given exporters flexibility to borrow against any receivables they have under this facility, and the ability to set off their import payables against receivables, which should overall reduce the demand for foreign exchange further. In another step, any surplus balance that a partner bank may hold is eligible to be used for cross payments, and also for capital account transactions, such as investments in government securities, as per existing guidelines.

The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team.