RBI allows settlement in rupee to settle trade: Basics Explained

The Reserve Bank of India (RBI) has put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR and has allowed trade settlements between India and other countries, including Sri Lanka and Russia, in rupees. The move aims to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR.

The exchange rate between the currencies of the two trading partner countries may be market-determined, the RBI said. The RBI has allowed international trade to be settled in INR. In the Indian Rupee. This means, that if someone in another country wants, it can choose to pay us in INR and take our goods or services (paying for exports). And conversely, we could pay in INR for goods or services we import.

            Banks have to take approval on doing such transactions. Banks in India are permitted to open Vostro accounts in rupees (Vostro accounts are arrangements between banks across geographies). The RBI said for settling trade transactions with any country, banks in India might open special rupee Vostro accounts of correspondent bank/s of the partner country in trading.

                    Regarding the use of its surplus balance, the RBI said it could be used for capital and current account transactions in accordance with mutual agreements. The balance in special Vostro accounts can be utilized for payments for projects and investments, export and import advance flow management, and investment in government securities, the central bank said.


The above policy decision of RBI is aimed primarily at reducing the demand for foreign exchange for settlement purposes of current account-related trade flows. The internationalization of the rupee gets a major boost

Internationalisation means the currency can be freely transacted by both resident and non-residents, and be used as a reserve currency for global trades. Currency internationalization is the extensive use of the currency beyond its origin country. It can lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk,

Foreign exchange reserves are the foreign currencies held by a country’s central bank. A strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to the foreign currency from the domestic market. They are called reserved assets in Balance of Payments and are located in capital account.

A capital account keeps a record of all the transactions related to assets between India and other countries. This includes all kinds of investment assets like shares, debt, and property, or even corporate assets. Currently, India has a partially convertible capital account policy.

         The balance of payments account, which a statement of all transactions made between a country and the outside world,

consists of two accounts — current and capital account.

While the current account deals mainly with the import and export of goods and services,

the capital account is made up of cross-border movement of capital by way of investments and loans.

Current account convertibility refers to the freedom to convert your rupees into other internationally accepted currencies and vice versa without any restrictions whenever you make payments.

               Similarly, capital account convertibility means the freedom to conduct investment transactions without any constraints. Typically, it would mean no restrictions on the amount of rupees you can convert into foreign currency to enable you, an Indian resident, to acquire any foreign asset. Similarly, there should be no restraints on your NRI cousin bringing in any amount of dollars or dirhams to acquire an asset in India.

India has come a long way in liberating capital account transactions in the last three decades and currently has partial capital account convertibility. Developing is usually cautious in opening up their capital account. This is because inflows and outflows of foreign and domestic capital, which are prone to volatility, can lead to excessive appreciation/depreciation of their currency and impact monetary and financial stability.

The SS Tarapore committee’s report on fuller capital account convertibility released in 2006 argued that even countries that had apparently comfortable fiscal positions have experienced currency crises and rapid deterioration of the exchange rate when the tide turns.


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