RBI's new international trade settlement move to reduce pressure on rupee: Experts

Mumbai: RBI's move to allow cross border trade transactions in rupee will reduce the demand for foreign currency for settlement of trade and help curb the fall in the domestic currency, experts say.

According to them, it is also a step towards liberalisation of capital account convertibility.

Reserve Bank of India (RBI) on Monday asked banks to put in place additional arrangements for invoicing, payment, and settlement of exports/ imports in the domestic currency in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in rupee.

"With this, there will be less pressure on rupee as dollar demand for imports will not be there," Bank of Baroda's Chief Economist Madan Sabnavis said.

In a report, Bank of America Merrill Lynch said the measure should arguably take off immediate pressure on the demand for dollars.

Amid ongoing rupee weakness, the steps appear to be aimed at reducing demand for foreign exchange by promoting rupee settlement of trade flows, Barclays MD & Chief India Economist Rahul Bajoria said.

For settlement of trade transactions, the banks concerned will require Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country, according to RBI.

Indian importers undertaking imports through this mechanism shall make payment in the rupee which shall 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/ supplier, RBI said.

Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in rupee from the balances in the designated special vostro account of the correspondent bank of the partner country.

CR Forex Advisors Managing Director Amit Pabari said allowing payments for cross-border trade in rupee through the vostro account is a step taken specially to benefit trade with Russia.

"In a bid to ease the pressure on the country's import bill after sharp depreciation in the rupee, RBI is forced to come up with an alternative payment mechanism where the bank seems to be aiming for an explicit rupee-rouble trade arrangement between India and Russia to settle oil dues in rupees instead of dollars," Pabari said.

According to India Ratings and Research's Soumyati Niyogi, RBI announcement is part of the measures towards liberalisation of capital account convertibility.

"If the capital account gets fully convertible and there are no restrictions on bringing money and taking out money from India, then the requirement of the foreign exchange reserves will not be that much for trade transactions," he said.

However, volatility of overseas flows and their impact on the domestic economy will be critical to watch for, given low absorption capacity of the economy and banking system as a whole, Niyogi added.