According to the central bank, this will spur global trade growth with emphasis on exports from India and support the growing interest of the global trading community in the domestic currency. This comes amid the rupee touching a record low against the dollar. India’s trade with Russia stood at $13.1 billion in 2021-22.
see full image
Experts lauded the move, saying it would speed up transactions between the two countries.
Following the sanctions, payments to any Russian entity, including those that have not been approved, are taking longer than usual due to increased due diligence.
Federation of Indian Export Organization (FIEO) president A. According to Sakthivel, under the existing provisions of the Foreign Exchange Management Act, the final settlement should be in free foreign exchange except in Nepal and Bhutan. Sakthivel said that now, if the RBI approves, the final settlement for all the countries can be in Indian Rupee.
“Russian banks will have to open Vostro accounts in India, and whenever there is an export or import, that account will be debited or credited depending on the transaction,” said a senior private sector banker. Banks which are not part of OFAC sanctions list.
Enforced by the US Office of Foreign Assets Control (OFAC), the sanctions were implemented following Russia’s invasion of neighboring Ukraine in February. Indian banks have long expected the government and the RBI to work out an alternative payment mechanism, as it did in 2012 and again in 2018 when Iran sanctions were imposed.
“As far as India is concerned, it is a good step,” he said. Since we import more than we export, we will save foreign exchange under the new regime. For example, under normal circumstances, we would have had to pay Russia in dollars for oil purchases, which can now be done through the rupee-ruble route,” said Madan Sabnavis, chief economist at Bank of Baroda.
Under the mechanism, Indian importers will make payments in rupees, which will be credited to the Vostro account of the correspondent bank of the partner country. Similarly, Indian exporters will be paid export proceeds in rupees from the balance in the Vostro account of the partner country.
Industry experts said the pressure on India’s forex reserves would ease, a collateral benefit of the move to allow trading in rupee. Furthermore, the opening of this trade settlement route shows that Russia’s importance as India’s trading partner is in the face of increasing pressure by Western countries to cut the link. That said, bankers believe that this route will remain confined to Russia for the time being, and it is unlikely that other large trading partners would prefer to settle transactions in rupees.
Others saw it as an extension of RBI’s announcements last week as a move to boost foreign exchange inflows and stabilize the rupee.
Barclays economists said the measures are aimed primarily at reducing foreign exchange demand for settlement purposes related to current account-related trade flows.
“The new steps allow Indian exporters and importers to use special Vostro accounts denominated in rupees to settle their rupee-denominated trade invoices. The move could be particularly useful for neighboring countries, and those countries willing to use the rupee as a base currency for trade diversification in their settlement regulations,” economists at Barclays said in a note to clients on Monday. Told.
Meanwhile, exporters are somewhat in the dark about how the policy will be implemented, including the partner countries and the items to be covered.
“Our two biggest markets are Russia and Iran. Exports are taking place to Iran but through other countries; hence, with the RBI setting up a mechanism to settle trade transactions in rupees, tea exports to these two markets which has not been fully exploited in recent years due to payment issues,” said Anshuman Kanoria, President, Indian Tea. Exporters Association.
Mint had earlier reported that the Vostro account set up for trade purposes with Iran had dried up as India was barred from sourcing oil from Iran amid US sanctions. Exporters had said payment problems in Iran’s market prevented them from filling the gap left by Sri Lanka, which is in the midst of a serious financial crisis.
“With the new payment mechanism, India will be able to avoid sanctions imposed on many countries like Russia and Iran,” said Vijay Kalantri, president and president of All India Association of Industries. Kalantri said trade between Brazil, Russia, India, China and South Africa (BRICS) and South Asian countries will develop if rupee-rupee transactions take place in India, which is a long-standing demand of the industry.