India’s efforts to promote the internationalization of trade in rupees is creating new opportunities for the country’s foreign trade, even amidst global economic uncertainties. The Foreign Trade Policy 2023 seeks to increase India’s exports to USD 2 trillion by 2030, which is nearly a three-fold jump from expected exports of $770 billion in the financial year 2022/23. The policy is focused on increasing exports on the basis of rupee invoicing and proposes that both trading partners raise their invoicing and settle their transactions on a bilateral basis in rupees. This framework will facilitate the invoicing of exports and imports in rupees, market-determined exchange rates between currency pairs of trading partners, and trade settlement via special rupee Vostro accounts.
Rupee trade is an additional mechanism to the existing ones proposed by India to promote bilateral trade, and it is open for every country that wants to join. So far, Russia, Sri Lanka, and Mauritius have been approved. This means that India has a tie-up with an Indian bank and corresponding bank in these countries.
The RBI’s order in July 2022 allowing invoicing, payment, and settlement of trade in Indian rupees has resulted in the promotion of rupee invoicing. The order is aimed at facilitating the growth of global trade and supporting the interests of the global community in Indian Rupee.
The international economic slowdown, accompanied by sanctions on Russia and the aggressive raising of rates by the Federal Reserve of America, has created new challenges for economies. The sanctions on Russia have given rise to a new market structure to de-dollarize the international market and opened doors for foreign trade in local currency amid economic slowdowns. As a fallout of the sanctions and war, making payments to Russia in US dollars became increasingly difficult, triggering a search for solutions in national currencies and de-dollarization worldwide. Today, most foreign trade is in internationally accepted currencies like the dollar, euro, and pound, followed by the yen and Swiss franc. IMF data on global holdings of foreign exchange reserves suggests that 60% is held in dollars, followed by 18 to 20% in euros, 5% in yen and pounds, and 3% in yuan.
In this context, India has taken a bold step by entering into an agreement with 18 countries, including Russia, Germany, Israel, the UK, Sri Lanka, and Singapore, to trade in rupees. Traders will import from these countries in rupees through Vostro accounts. In order to have a smooth business, 18 countries have opened their Vostro accounts, and more than 60 banks have signed with Indian banks for special Vostro accounts. RBI has allowed special Vostro accounts to invest the surplus balance in Indian government securities to popularize the arrangement.
The benefits of rupee trade are many, including the lowering of transaction costs, greater price transparency, quick settlement time, promoting international trade, reduction in hedging expenses, international recognition of the rupee, reduction in the cost of holding foreign reserves by RBI, and reducing India’s merchandise trade deficit. It will reduce the conversion cost for both the importers and exporters, thereby influencing the price of goods and escalating their demand in the market. This can be better explained by supposing that an Indian buyer enters into a transaction with a seller from Germany. The Indian buyer has to convert their rupees into US dollars, the seller will receive those dollars and convert them into euros. Both parties have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuation. Herein comes rupee trade, instead of paying or receiving in US dollars, the invoice will be made in Indian rupees if the counter-party has a rupee Vostro account.
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