In July 2022, the Reserve Bank of India issued a circular authorizing an additional arrangement for invoicing, payment and settlement of exports/imports in Indian Rupees (INR) to promote the growth of global trade with emphasis on India’s exports and to support the growing interest of the global trading community in the rupee as an international currency.
The framework involves invoicing of exports and imports in rupees, market-determined exchange rates between the currencies of trading partner countries, and settlement through special rupee vostro accounts opened with licensed concessionary banks in India.
The international rupee settlement is gaining importance against the backdrop of the US Federal Reserve’s aggressive policy rate hikes and hawkish stance.
“The framework could significantly reduce the net demand for foreign currencies, particularly the US dollar, for the settlement of current account-related trade flows. In addition, the use of INR in cross-border trade is expected to mitigate currency risk for Indian companies,” the survey said.
Following the Russo-Ukrainian war and sanctions imposed by the West, India is trying to promote the rupee trade.
Currency volatility protection not only lowers the cost of doing business but also enables better business growth, thereby improving the chances of Indian businesses to expand globally. The survey indicates that it also reduces the need to hold foreign exchange reserves and reliance on foreign currencies, making the Indian economy less vulnerable to external shocks.
“Furthermore, it could help Indian exporters get advance payments in INR from overseas customers and in the longer term promote INR as an international currency once the rupee settlement mechanism gains traction. ground,” he added.
One of the prerequisites for the emergence of an international currency is that said currency should increasingly be used for commercial invoicing.
In terms of foreign exchange turnover (daily averages), according to the BIS Triennial Central Banking Survey 2022, the US dollar is the main vehicle currency, accounting for 88% of global foreign exchange turnover. The Indian rupee was only 1.6 percent.
“If INR turnover increases to reach the share of non-US and non-EUR currencies in global forex turnover of 4%, INR could be considered an international currency, reflecting India’s position in the global economy,” he added.
Indian banks have already opened Special Vostro Rupee Accounts (SVRA) with banks in these three countries, operationalizing the Rupee Trade Agreement.
Recently, SBI Mauritius Ltd and People’s Bank of Sri Lanka opened an SVRA with State Bank of India (SBI). In addition, Bank of Ceylon has opened an account in its Indian subsidiary in Chennai.
A total of 18 of these special rupee accounts have been opened by 11 banks, including 2 Russians and one Sri Lankan, after approval by the Reserve Bank of India (RBI).