Corporate & Commercial Monthly Newsletter | August 2022

• Published date: 10 August 2022
• Subject Matter: Corporate/Commercial Law, International Law, Corporate and Company Law, Contracts and Commercial Law, International Trade & Investment, Securities
• Law Firm: HSA Advocates
• Author: Mr Amaresh Singh, Ashutosh Gupta, Soumya Kanti De Mallik, Prithviraj Chauhan, Himanshu Seth and Sinjini Saha

RBI | Circular on international trade settlement in Indian rupees (INR)

Reserve Bank of India through Circular dated July 11, 2022 (Circular) has permitted international trade settlement in Indian Rupees (INR). An INR based mechanism for settlement of international trade signifies that INR, despite being a partially convertible currency, will be a valid currency for exports and imports of goods and services.

This decision of RBI is intended to promote growth of global trade in INR, and to foster and support an increasing interest of the global trading community in the currency. International trade settlement in INR is in addition to extant practice of trade settlement in any freely convertible foreign exchange.

The Circular lays down the foundation to a framework for cross border trade transactions in INR. It allows denomination and invoicing of all exports and imports in INR and market determination of exchange rate between the currencies of two trading partner countries. Additionally, it allows AD banks in India to open 'Special Rupee Vostro Accounts' of correspondent banks of the partner trading country, for settlement of trade transactions, subject to approval of Foreign Exchange Department of the RBI. Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into such account, while Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balance in such account.

The AD banks maintaining the account shall ensure that the correspondent bank is not from a country or jurisdiction designated as high risk or non-cooperative by the Financial Action Task Force (FATF). AD banks should refer to FATF's list of countries having weak measures to combat money laundering and terrorist financing.

India has taken this step forward, to promote INR as a global currency, for various reasons, including the following:

• Preserve foreign exchange: INR has recently slid to lifetime lows against the US Dollar (USD), exacerbating the threat of inflation as India relies on overseas shipments for meeting four-fifths of its annual fuel demand. Delinking trade settlement to the USD, and possibly introducing a greater share of INR in the global economy, will help preserve India's foreign exchange stockpile.
• Trade with sanctioned and neighboring countries: This will facilitate trade with partners of India facing sanctions from the west, particularly US and Europe such as Russia and Iran. It has become extremely difficult to trade with these countries in freely convertible currencies of USD and the Euro, virtually cut off from standardized international cross-border payment platforms. Further, the move will also facilitate easier trade with neighboring countries such as Sri Lanka, removing the USD exchange rate risk.
• Control trade deficit: India has recently been seeing a massive outflow of foreign portfolio investments and record trade deficits. The move by RBI will help in controlling the increased trade deficit as it is more likely that an INR trade settlement mechanism is adopted by countries where India has trade surplus as opposed to countries which have trade surplus with India. This also comes at a time when RBI is taking other measures to control trade deficit and preserve foreign exchange, such as allowing banks to raise interest rates on foreign-currency-holding accounts of...