Russia and Sri Lanka will be the first to employ the Indian rupee trade settlement mechanism

Russia and Sri Lanka will be the first to employ the Indian rupee trade settlement mechanism

Sri Lanka is a dollar-strapped country that has been sanctioned. Russia will be the first country to employ the Indian rupee trade settlement mechanism, a game-changing move that permits Indian rupees to be used in international transactions instead of dollars and other major currencies.

The Reserve Bank of India has authorized banks to open 05 unique rupee trading accounts known as Vostro accounts for trade with Sri Lanka using the Indian rupee trade settlement system.

Similarly, the Reserve Bank of India has authorized banks to open 12 ‘Vostro’ for rupee commerce with Russia. The RBI, which established the system in July, has also sanctioned another account for trading with Mauritius.

A brief about Russia and Sri Lanka will be the first to employ the Indian rupee trade settlement mechanism

According to an Indian government official, the administration is looking to include other countries in the process that are short on money. Currently, five to six banks are permitted to open Vostro accounts in order to enable international trade settlement in rupees.

“Several issues have been resolved. Exporters and importers have started seeking banks to create accounts “Ajay Sahai, director general of the Federation of Indian Export Organizations (FIEO), stated. “As a result, trade settlement with Russia using the new payment method is scheduled to begin soon for some shipments.” “Sahai elaborated.

The decision is significant in light of Russia and India’s growing trade deficit. While Russia has quickly surpassed India as the country’s leading oil supplier, Indian exports to the sanctions-hit country are dropping as exporters are apprehensive about western sanctions and the lack of a smooth payment process.

Other nations are showing interest in India’s rupee trade settlement mechanism, including Tajikistan, Cuba, Luxembourg, and Sudan.

The Reserve Bank of India (RBI) has created a concept paper for trade settlement in the Indian rupee with the UAE, the country’s third-largest trading partner. According to India’s Ambassador to the UAE, Sunjay Sudhir, the Central Bank of the UAE is looking into the matter and discussing it with RBI authorities in order to put the system into action.

“In September, we had a meeting. The RBI concept paper has been shared with the UAE, which has already selected a nodal person for this. The central banks of both countries are in talks to make trading in local currencies a reality. “The major goal here is to lower the transaction cost,” Sudhir explained.

Sri Lankan nationals can now physically possess $10,000 (Rs8,26,823) after creating Vostro accounts. This also means that Sri Lankans and Indians can conduct international transactions in Indian rupees rather than US dollars. Since July of this year, the Indian government has been attempting to pull countries in need of dollars into its rupee settlement process.

Declaring the rupee as a legal currency in Sri Lanka will offer the government with much-needed liquidity support to help it weather its economic crisis in the face of limited dollar availability. When investors begin selling in domestic currency, the country’s economy is more likely to avert further escalation of the balance of payments issue.

The Indian Finance Ministry has also requested that the Indian Banks’ Association (IBA) and the FIEO launch an awareness campaign to educate stakeholders on rupee trading.

Under the Foreign Exchange Management Act of 1999, the RBI has detailed the general framework for cross-border commerce transactions in rupees. All exports and imports under this arrangement may be denominated and invoiced in rupees, according to this. The exchange rate between the currencies of the two trading partners may be established by the market. Under this structure, commerce transactions must be settled in rupees.

Indian importers using this system must pay in rupees, which must be credited into the Vostro account of the partner country’s correspondent bank, against invoices for the supply of products or services from the foreign seller or provider. Similarly, Indian exporters who use this system to export products and services must be paid in rupees from the balance in a specified Vostro account of the partner country’s correspondent bank.

Currency experts believe that India’s trade imbalance would be reduced if the rupee became an international currency. In the global market, the rupee will strengthen. Other countries may begin to use the rupee as a trade currency.

The rupee was previously accepted in Gulf countries like as Qatar, the UAE, Kuwait, and Oman in the 1960s. India also had payment arrangements with Eastern Europe, with the rupee serving as the unit of account in these accords. However, these arrangements were discontinued in the mid-1960s.

The rupee can be converted into an international currency by making it a stable currency that facilitates international trade or by holding it as an asset. A currency is considered ‘international’ if it is widely accepted as a means of exchange for trade all over the world.

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