Rupee depreciation: Benefits of RBI move on settlement of international trade payments in Indian Rupees

The US Dollar Index has reached a 20-year high leading to the depreciation of the Indian currency and other global currencies. RBI’s move to pay for international trade transactions in INR will take some pressure off the Indian Rupee depreciation against the USD.

RBI allows INR payment for international trade payments

On 11th July 2022, the Reserve Bank of India (RBI) issued a notification titled: International Trade Settlement in Indian Rupees (INR). As per this notification, the RBI has said that Indian importers can pay for their imports from a foreign country in Indian Rupees (INR) instead of US Dollars or any other foreign currency. Similarly, Indian exporters can get paid for their exports to any foreign country in Indian Rupees (INR) instead of US Dollars or any other foreign currency.

Why has the RBI introduced the INR payment mechanism?

Some of the reasons why the RBI has introduced the INR payment mechanism include:

Also Read: How Will The Indian Rupee Falling Against The US Dollar Affect Your Finances?

1) To overcome US sanctions
The US and Europe have imposed economic sanctions on Russia after it invaded Ukraine. India has been importing crude oil from Russia in the last few months. However, due to US sanctions on Russia, the Indian companies importing Russian crude oil cannot pay the Russian oil-exporting companies in US Dollars. The Indian Rupee payment mechanism will allow India to pay for Russian crude oil in Indian currency.

2) To support the Indian currency
On 12th July, the US Dollar Index hit a 20-year high level of 108. A strong US Dollar has weakened most global currencies, including the India Rupee (INR). Also, Indian imports are much higher than exports. The US Dollar strength and the outflow of US Dollars from India pushed the Indian Rupee (INR) to an all-time low of 79.33 against the USD on 11th July. The Indian Rupee payment mechanism will take some pressure off the INR.

Also Read: Top 4 Tips To Inflation-Proof Your Investments

How will the INR payment mechanism work for India’s imports?

Let us take an example to understand how the INR payment mechanism will work for imports. An Indian company like Indian Oil Corporation (IOC) imports crude oil from a Russian company like Rosneft. To facilitate this trade transaction under the INR payment mechanism, a Russian Bank (correspondent bank) will have to approach an Indian Authorised Dealer (AD) Bank like UCO Bank to open a Special Vostro Account.

UCO Bank will open an INR-denominated Vostro Account in one of its branches for the Russian Bank. IOC will pay Rosneft’s invoice amount for the imported crude oil in Indian currency in the Russian Bank’s Vostro Account. The Russian Bank will pay the equivalent amount in Russian currency (Rouble) to Rosneft in Russia.

How will the INR payment mechanism work for India’s exports?

Let us continue with our earlier example. You must be wondering what the Russian Bank will do with the INR balance in the UCO Bank Vostro Account? Suppose a Russian retail chain wants to import a consignment of garments from an Indian company like Arvind Mills. The Russian retail chain will pay the consignment equivalent amount to the Russian Bank in Russia in Russian Roubles. The Russian Bank will pay the consignment equivalent amount in Indian currency (INR) to Arvind Mills from the UCO Bank Vostro Account.

The INR balance in Vostro Account can also be used for payments for projects and investments in India. It can also be used for investing in Indian Government Treasury Bills or Government Securities.

Also Read: Why Does The Rupee Value Fluctuate And What Does It Mean For You?

INR payment mechanism: RBI’s step is in the right direction

The INR payment mechanism will help Indian crude oil importers overcome the US sanctions on Russia. It will also help stem the outflow of US Dollars from India. Thus, it will ease some pressure on the INR depreciation due to the US Dollar’s strength globally. Hence, the RBI has taken a step in the right direction by introducing the INR payment mechanism.

On 11th July 2022, the Reserve Bank of India (RBI) issued a notification titled: International Trade Settlement in Indian Rupees (INR). As per this notification, the RBI has said that Indian importers can pay for their imports from a foreign country in Indian Rupees (INR) instead of US Dollars or any other foreign currency. Similarly, Indian exporters can get paid for their exports to any foreign country in Indian Rupees (INR) instead of US Dollars or any other foreign currency.

Why has the RBI introduced the INR payment mechanism?

Some of the reasons why the RBI has introduced the INR payment mechanism include:

Also Read: How Will The Indian Rupee Falling Against The US Dollar Affect Your Finances?

1) To overcome US sanctions
The US and Europe have imposed economic sanctions on Russia after it invaded Ukraine. India has been importing crude oil from Russia in the last few months. However, due to US sanctions on Russia, the Indian companies importing Russian crude oil cannot pay the Russian oil-exporting companies in US Dollars. The Indian Rupee payment mechanism will allow India to pay for Russian crude oil in Indian currency.

2) To support the Indian currency
On 12th July, the US Dollar Index hit a 20-year high level of 108. A strong US Dollar has weakened most global currencies, including the India Rupee (INR). Also, Indian imports are much higher than exports. The US Dollar strength and the outflow of US Dollars from India pushed the Indian Rupee (INR) to an all-time low of 79.33 against the USD on 11th July. The Indian Rupee payment mechanism will take some pressure off the INR.

Also Read: Top 4 Tips To Inflation-Proof Your Investments

How will the INR payment mechanism work for India’s imports?

Let us take an example to understand how the INR payment mechanism will work for imports. An Indian company like Indian Oil Corporation (IOC) imports crude oil from a Russian company like Rosneft. To facilitate this trade transaction under the INR payment mechanism, a Russian Bank (correspondent bank) will have to approach an Indian Authorised Dealer (AD) Bank like UCO Bank to open a Special Vostro Account.

UCO Bank will open an INR-denominated Vostro Account in one of its branches for the Russian Bank. IOC will pay Rosneft’s invoice amount for the imported crude oil in Indian currency in the Russian Bank’s Vostro Account. The Russian Bank will pay the equivalent amount in Russian currency (Rouble) to Rosneft in Russia.

How will the INR payment mechanism work for India’s exports?

Let us continue with our earlier example. You must be wondering what the Russian Bank will do with the INR balance in the UCO Bank Vostro Account? Suppose a Russian retail chain wants to import a consignment of garments from an Indian company like Arvind Mills. The Russian retail chain will pay the consignment equivalent amount to the Russian Bank in Russia in Russian Roubles. The Russian Bank will pay the consignment equivalent amount in Indian currency (INR) to Arvind Mills from the UCO Bank Vostro Account.

The INR balance in Vostro Account can also be used for payments for projects and investments in India. It can also be used for investing in Indian Government Treasury Bills or Government Securities.

Also Read: Why Does The Rupee Value Fluctuate And What Does It Mean For You?

INR payment mechanism: RBI’s step is in the right direction

The INR payment mechanism will help Indian crude oil importers overcome the US sanctions on Russia. It will also help stem the outflow of US Dollars from India. Thus, it will ease some pressure on the INR depreciation due to the US Dollar’s strength globally. Hence, the RBI has taken a step in the right direction by introducing the INR payment mechanism.

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