RBI is the governing bank in our country and every analyst and entrepreneur awaits the RBI announcements from time to time as they are bound to have an impact on our economy. Even the world monitors the policy decisions of other economies to keep in line with them as well as to understand the developments around the globe. Whenever the country’s economy is endangered, it is the responsibility of the RBI to step in and take measures to ensure stability and sustainable growth for the country. The latest announcement from RBI is set to bring unprecedented changes for Indian traders. The move is viewed to have short-term as well as long-term effects.
So what is this move by RBI and what are its results for India and the macro effect of the same on the world? Let us discuss the same in this article below.
What is the latest announcement by RBI?
RBI announcement on 11th July 2022 issue of notification is relating to the International Trade Settlement. As per the notification, Indian traders can use INR for making payments for their imports as well as accept INR for the exports made by them. The RBI notification has also placed a systematic arrangement for the invoicing, payment, or settlement of imports/exports. The invoicing and payments for the international trader will be done in terms of INR and the exchange rate between the currencies will be determined based on the market forces.
The said notification of the RBI read as follows,
‘In order 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, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.’
How will the new system work?
Under this new payment system, The authorized dealers in the country will have to open a special Vostro account in the corresponding bank of the trading partner country. So what is this Vostro account?
A Vostro account is an account that is held by a bank on behalf of another bank. The Vostro account acts like a custodian account and when an Indian importer needs to make payment for the imports, INR is credited to the Vostro account of the correspondent bank in the trading partner country. Similarly, when the Indian trader is to receive payment for the exports under this system, the same will be paid from the balance in the designated Special Vostro account of the correspondent bank of the partner country.
What was the need for this move?
India is a country that is a net importer of goods and services. Currently, approximately 60% of the international trade in the country is done in US Dollars and the balance in other currencies with a very small portion in INR. The trade deficit of the country is increasing and this has a direct impact on the foreign reserves. We have recently seen what is the devastating impact of depleting forex on an economy with the situation in Sri Lanka. This move of RBI will help in safeguarding the precious foreign reserves.
Given the impact of the war between Russia and Ukraine, the former has been pushed out of the SWIFT payment system which is crucial for international trade. India is currently trading heavily with Russia despite the sanctions and, this move will have a beneficial impact on both nations providing a smooth passage for the trade.
India is seeing a tremendous and continuous slide in the value of the currency in the international market. Currently, the INR is trading at more than Rs. 79 for one Dollar and may slide further in the coming months. The move to internationalize the INR is believed to help in arresting the depreciating currency by creating an international demand for the same.
What will be the impact of this move?
With the INR going global, although it is not expressly mentioned, the prime benefit from the same will be seen in the trade with Russia. India will also benefit from the international presence of the INR in terms of creating smooth trade paths with other countries that are willing to increase their trade with us. This will eventually help create demand for Indian goods and services thereby reducing the trade deficit over time. This move of RBI is seen to make India self-reliant and global power in international trade.
Conclusion
The RBI announcement to internationalize the rupee is seen to be a major development that is expected to have a multi-fold impact on the economy. The central bank has laid down a detailed procedure for the trade in INR and also the use of funds in the Vostro account. This move will also help the individual traders and exporters of the country who had to bear the risk of foreign exchange as it will not be the case hereon.
FAQs
The permissible use of surplus amount in the Vostro account will include the following,
-Payments for permissible investments and projects
-Use of funds for import and export advance flow management
-Investment in permissible securities like Treasury Bills, Government securities, etc., subject to rules -under FEMA or any other prevailing law.
As per the guidelines of RBI, the recording and reporting of the transactions will be done as per the regulations under FEMA.
A Vostro account is an account held by a bank in the bank of the partner trading country. The transactions under international trade will be carried out through this account.
The exchange rates for transactions under the new policy will be as per the prevailing market rates and as per the agreement between the partner countries.
