The Reserve Bank of India (RBI) on Monday announced measures for domestic traders to settle imports and exports in rupees, a move experts say is aimed at easing trade with sanctions-hit Russia. According to the central bank, this would boost the growth of world trade with an emphasis on exports from India and support the growing interest of the global business community in the domestic currency. This comes at a time when the rupee is touching record lows against the dollar. India’s trade with Russia in 2021-22 was $13.1 billion.
Experts welcomed the move, saying it would speed up transactions between the two countries. Post-sanctions, payments to any Russian entity, including non-sanctioned ones, take longer than usual due to increased due diligence. According to A. Sakthivel, president of the Federation of Indian Export Organizations (FIEO), under the existing provisions of the Foreign Exchange Management Act, the final settlement, except for Nepal and Bhutan, must be in free foreign exchange. Now, if the RBI approves, the final settlement for all countries can be in the Indian rupee, Sakthivel said.
“Russian banks will have to open Vostro accounts in India and whenever there is an export or import, the account will be debited or credited depending on the transaction,” said a senior private sector banker, adding that this would only be possible for Russia banks that are not part of the OFAC sanctions list.Sanctions enforced by the US Office of Foreign Assets Control (OFAC) were imposed after Russia’s invasion of Ukraine in February. Indian banks have long hoped that the government and the RBI would work out an alternative payment mechanism, as they did when sanctions were imposed on Iran in 2012 and again in 2018.
“It is a good step as far as India is concerned. Since we import more than we export, we will save foreign currency in the new arrangement. For example, under normal circumstances we would have to pay Russia in dollars to buy oil, 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 correspondent bank account of the partner country. Similarly, Indian exporters will be paid export proceeds in Rupees from the partner country’s Vostro account balances.
Industry experts said the pressure on India’s foreign exchange reserves will ease, a side benefit of the move to allow trading in rupees. Moreover, the opening of this trade route shows the importance of Russia as India’s trading partner in the face of increasing pressure from Western countries to cut ties. However, bankers believe this route will be limited to Russia for the time being, and other major trading partners are unlikely to prefer settling transactions in rupees.
Others saw it as an extension of last week’s RBI announcement to boost forex inflows and a move to stabilize the rupee. Economists at Barclays said the measures are aimed primarily at reducing demand for foreign exchange to settle current account-related trade flows.“The new steps allow Indian exporters and importers to use Vostro special rupee denominated accounts to settle their trade invoices in rupees. This move may be particularly useful for neighboring countries and those countries that wish to use the rupee as a base currency in their settlement rules for trade diversification,” Barclays economists said in a note to clients on Monday on how the policy will be implemented, including partner countries and items that could be covered.
