With the war between Russia and Ukraine, the US imposed economic sanctions on Russia and has frozen the assets of some important Russian banks. Many oil producers were also excluded from the market, making it difficult for the country. Ever since Russia started selling oil at low prices, the trade relations between India and Russia have strengthened. Since they could not settle the payments in US dollars, the RBI took a major step by allowing trade settlement in rupees.
What does this mean?
Whenever the countries import or export goods and services, they have to make payments using foreign currency. Most of the time, India uses US dollars for these trade transactions. So, if an Indian buyer has entered into a transaction with a seller from another country, then both the parties will have to bear the risk of forex fluctuations.
Now, this is where the trade settlement in rupees eases the process. The invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.
However, for such transactions, the banks will have to get them approved by the Reserve Bank of India (RBI). As per the broad framework for cross-border trade transactions in INR under the Foreign Exchange Management Act, 1999 (FEMA), all exports and imports under this arrangement may be denominated in rupees and the exchange rate between the currencies of the two trading partner countries may be market determined.
With the fall in the value of the rupee in the recent times, this will help in reducing the demand for foreign exchange and promoting rupees in trade settlements.
This will also significantly reduce the risk of forex fluctuation and save dollar outflows as the dollar is the currency used for almost all the international trade.
Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India. Foreign traders can pay and receive money from Indian traders through these accounts.