On 11-07-2022, Reserve Bank of India has issued guidelines on International Trade Settlement in Indian Rupees to promote growth of global trade, emphasizing exports, and to support the increasing interest of global trading community in INR.
According to this new mechanism an additional arrangement for invoicing, payment, and settlement of exports/ imports in Indian Rupees (‘INR') will be made. Authorized Dealer (‘AD') banks have to get approval from Foreign Exchange Department of Reserve Bank of India (‘RBI'), Central office, Mumbai.
Key Points:
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Broad Framework for cross-border transactions:
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Invoicing in INR
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Exchange Rate between currencies of two trading partner countries must be market determined.
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Settlement of trade transactions must take place in INR
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Special Vostro Account: is an account that a correspondent bank holds on behalf of another bank. AD banks have been permitted to open such accounts under Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016. Th following measures have to be taken in order to allow such a transaction:
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Indian importers must make payment in INR that will be credited into such account against the invoices.
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Indian exporters must be paid in INR from the balances in such accounts of the correspondent bank.
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Documentation: Letter of credit and other trade related documents must be decided mutually between the banks of partner trading countries under the framework of Uniform Customs and Practice for Documentary Credits.
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Advance against exports must be received in INR through Rupee Payment Mechanism. Indian banks must ensure that the available funds in these accounts are used towards the payment obligations arising out of already executed export orders/ export payments in the pipeline and only then any further advance payment against exports must be accepted.
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Setting off of export receivables against import payables must be allowed through Rupee Payment Mechanism subject to the conditions under master Direction on Export of Goods and Services 2016.
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Bank Guarantee is permitted subject to adherence to the provisions of FEMA Notification No. 8 and the provisions of Master Direction on Guarantee and Co-acceptances.
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The Rupee Surplus balance has to be used for permissible capital and current account transactions. Such as:
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Payment of projects and investments
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Export/ Import advance low management
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Investment in Government Treasury Bills, Securities
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Reporting of cross-border transactions to be done in adherence to guidelines under FEMA, 1999.
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Approval Process: The bank of the partner country can approach an AD bank for opening of Vostro Account. The AD bank has to seek approval from the RBI with details of arrangement. AD bank must ensure that the correspondent bank is not from a country or jurisdiction in the updated Financial Action Task Force (‘FATF’) Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures.