Why in news? 

The Reserve Bank of India (RBI) has put in place a mechanism to facilitate international trade in rupees (INR), with immediate effect. However, banks acting as authorised dealers for such transactions would have to take prior approval from the regulator to facilitate this.

Why this decision?

• In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.

How will it be implemented?

• Before putting in place this mechanism, banks will be required to take prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office at Mumbai.
• All exports and imports under this arrangement may be denominated and invoiced in rupee (INR) and the exchange rate between the currencies of the two trading partner countries may be market determined.
• It said AD banks in India had been permitted to open Rupee Vostro Accounts
• Indian importers undertaking imports via this mechanism will make payment in INR which will be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller.
• Indian exporters using the mechanism will be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

Advantages:

• The RBI’s move to set up International Trade Settlement mechanism in INR would facilitate trade with countries under sanction like Iran and Russia
• The move would also reduce the risk of forex fluctuation specially looking at the Euro-Rupee parity.
• The move likely adding strength to the rupee in forex trade.

• As per the notification, Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism.