Exporters laud move to allow rupee trade but seek clarity on benefits

(Representative image)

Exporters widely supported the Reserve Bank of India’s latest move to settle trade transactions in the local currency, however, they sought more clarity on export benefits and operational guidelines of the new move.

As per the new settlement mechanism, exports and imports can be denominated and invoiced in rupees with the exchange rate between the trading partner countries to be market-determined.

“This move will pave the way for trading and settlement of Exim transactions in the Indian rupee. The timely move at a time when many countries are facing huge forex shortages in Africa and South America and allowing only Exim transactions through letters of credit will help our exporters and importers,” said Ajay Sahai, Director General of the Federation of Indian Export Organisations.

However, he said exporters are waiting for further clarification regarding the new regime, especially with regard to benefits for exports made in rupees. Until now, benefits were granted for export payments received in foreign currency.

While the industry sees the latest move as the first step towards full convertibility of the rupee, some said it will be difficult to push trade in the rupee if export benefits are not forthcoming. Officials in the commerce department did not say when such clarifications would come.

The RBI said authorised banks would need to take its permission before instituting the rupee trade settlement mechanism.

Also read: Trade settlement in rupee major step towards internationalising currency, experts say

System update needed

Exporters said various background systems and international payment channels would also need to be updated.

“The RBI recently updated norms for banks to settle transactions through the Asian Clearing Union mechanism. We are waiting for similar updates regarding the latest directive of the central bank,” a senior functionary of the Apparel Export Promotion Council said.

On July 8, the RBI authorised Indian banks to settle all current account transactions, including those related to trade, with Sri Lanka in any permitted currency outside the Asian Clearing Union (ACU) mechanism.

The ACU is an arrangement between the central banks of Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka. Under the ACU, member central banks settle payments for intra-regional transactions on a net basis. This reduces the use of foreign exchange reserves and transfer costs.

Currently, ACU settlements are done in US dollars, euros, and the Japanese Yen. Similarly, India is part of other international payment mechanisms that may require updates.

Also read: RBI Governor says will ensure orderly movement in rupee

Trade with Russia, Iran

The RBI’s move, which it said was to promote the growth of global trade and to support increasing global interest in the rupee, comes amid increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine.

The new steps allow Indian exporters and importers to use special vostro accounts denominated in rupees for settling their rupee-denominated trade invoices. A vostro account is an account that a correspondent bank holds on behalf of another bank.

“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,” said Rahul Bajoria, MD of Barclays.

Also read: Rupee down 15 paise to all-time low of 79.60 against US dollar

“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,” he added.

The move could be useful in trade with Russia, which has been at the receiving end of international sanctions and has effectively lost access to the dollar. The same would be true for Iran, which has remained under US sanctions.

Indian companies looking to take advantage of lower prices of Russian commodities and those in the retail and engineering spaces are the happiest with the latest move.

“Ever since sanctions were imposed on Russia, trade has been virtually at standstill with the country due to payment problems. As a result of the trade facilitation mechanism introduced by the RBI, we see the payment issues with Russia easing,” said Mahesh Desai, chairman of the Engineering Export Promotion Council.

The move would also reduce the risk of forex fluctuation, especially looking at the euro-rupee parity, he added.