The Reserve Bank of India (RBI) announced on Monday an arrangement for domestic traders to settle imports and exports in rupees, a move experts said is aimed at facilitating trade with sanctions-hit Russia.
According to the central bank, this will promote global trade growth, with an emphasis on Indian exports, and will support the global trading community’s growing interest in the domestic currency. This comes as the rupee falls to new lows against the US dollar. In 2021-22, India’s trade with Russia was worth $13.1 billion.
Experts praised the move, saying it would speed up transactions between the two countries. Payments to any Russian entity, including those that have not been sanctioned, have taken longer than usual as a result of increased due diligence.
According to A. Sakthivel, president of the Federation of Indian Export Organisations (FIEO), final settlements must be in free foreign exchange under the existing provisions of the Foreign Exchange Management Act, except for Nepal and Bhutan. If the RBI approves, the final settlement to all countries will be in Indian rupees.
“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,” a senior private sector banker explained, adding that this will only be possible for Russian banks that are not on the OFAC sanctions list.
The sanctions were imposed by the US Office of Foreign Assets Control (OFAC) following Russia’s invasion of Ukraine in February. Indian banks had hoped for a long time that the government and the RBI would come up with an alternative payment mechanism, as they did when Iran sanctions were imposed in 2012 and again in 2018.
“From the standpoint of India, it is a positive step.” We will save foreign currency under the new arrangement because we import more than we export. For instance, in the past, we would have had to pay Russia in dollars for oil purchases, but now we can do so through the rupee-rouble 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 partner country’s correspondent bank’s Vostro account. Similarly, Indian exporters will be paid rupees from the partner country’s balances in the Vostro account.
According to industry experts, the move to allow trade in rupees will relieve pressure on India’s forex reserves. Furthermore, the opening of this trade settlement route demonstrates Russia’s importance as India’s trading partner in the face of growing pressure from Western countries to cut ties. However, bankers believe that for the time being, this route will be limited to Russia, and other large trade partners are unlikely to prefer settling transactions in rupees.
Others saw it as a continuation of the RBI’s announcements last week to increase forex inflows and stabilise the rupee. Exporters are unsure how the policy will be implemented, including partner countries and the items that may be covered.