Trade in rupee: A little step forward but nothing more

Last Monday, the Reserve Bank of India (RBI) introduced an additional mechanism for invoicing, payment, and settlement of exports/imports transactions in Indian rupee (INR). It is a little step forward but nothing more.

Banks in India are already permitted to open INR Vostro Accounts for foreign banks through which inward and outward remittances are put through for individual and trade transactions. The INR in these accounts are convertible and exporters can get their incentives such as duty drawback, etc. for getting payments through debit to such accounts.

The new arrangement allows Indian banks to open Special Vostro Accounts (SVA) in INR for foreign banks through which international trade transactions can be settled. The INR in these accounts are non-convertible, similar to the non-convertible rupees in the arrangement with the East European block before the collapse of the Soviet Union. However, unlike that arrangement, the surplus balances in the SVA can be used towards payments for projects and investments, export/import advance flow management and investment in Government treasury bills, government securities, etc. That flexibility may not be reason enough for foreign banks to prefer SVA. Also, most foreign parties would like to deal in convertible currencies rather than in non-convertible INR.  There is no active market for INR with any currency except the US dollar, says Haresh Desai of Rajwade Treasury Consultants. The exchange rates for currencies other than US dollar are determined through cross-currency rates with US dollar as the intermediary, thus splitting the exchange rate risks. For example, in a trade transaction with any party outside the US, the Indian party bears the US dollar to INR exchange rate variation risks, whereas the foreign party bears the US dollar to home currency exchange rate movement risks. Transactions in INR shift entire exchange rate risks to the foreign party. It is difficult to fathom why any foreign trader would agree to that.

The RBI says exchange rate between the currencies of two trading partner countries may be market determined. Given the absence of a market for determining such rates, the present method of determining the rate through US dollar as intermediary is bound to continue. Regarding exchange of messages in a safe, secure, and efficient way, the banks can easily go back to the mechanisms widely used before the advent of SWIFT, the electronic platform for settling inter-bank transactions.

The RBI wants the available funds in SVA to be used towards payment obligations arising out of already executed export orders /export payments in the pipeline before allowing any receipt of advance payment against exports.

Speculations abound that traders in countries subject to US sanctions such as Russia, Iran, and Venezuela and even countries without adequate foreign exchange reserves might find it expedient to use the SVA. Such arrangements work when the trade balance is even. Anyway, Iran and Venezuela are subject to secondary sanctions and trade with Russia may also come under secondary sanctions as soon as Europe stops imports of crude oil by this year-end. Till then, Russia, running a trade surplus, may prefer to get paid in freely convertible currencies through non-sanctioned banks and use that to pay for its imports. However, if Russian banks opt for SVA for political reasons, our exporters may get higher prices given the limited options on how the INR balances in the SVA can be used.  

email: tncrajagopalan@gmail.com