Last week, RBI announced its decision to permit rupee-based trade settlements between India and other countries. The rupee, like all worldwide currencies, has been falling, and the RBI has been controlling the slide by drawing on the country’s foreign exchange reserves. While the RBI order does not explicitly state it, this arrangement is most likely limited to Russia. Following the Ukraine war, Russia was sanctioned, and the country was removed from the SWIFT system (the system used by banks for payments in foreign currency). This means that payments do not have to be made in foreign currency, which benefits both Russia and India. India Importer might be interested in importing goods in rupee terms after this facility in the following ways:
1. Consider the case of a Russian exporter. They will first approach one of their own banks and request the opening of a unique bank account in India known as Vostro (Latin for “yours”).
2. Because the account is now in India, an Indian Importer seeking to purchase Russian goods can simply put Indian rupees into this Vostro account.
3. As a result, the Russian exporter will possess Indian rupees for the time being. The Russian bank will assume an exchange rate and pay the exporters the amount of rubbles required.
4. But the rupees remain in the Vostro account in India, what becomes of it?
5. Assume there is another Russian company that wishes to import some goods from India. It might be able to pay the Russian bank in rubbles. And the bank may pay the Indian merchant with the rupees in the Vostro account.
6. Furthermore, if there are excess rupees in the Vostro account, the Indian bank could invest them in Indian government bonds.
This facility would primarily be used for importing Crude Oil, Textiles and Essentials, etc whereas its still unclear whether this facility will be beneficial to bullion trade or not due to following reasons:
• Its still a grey area, whether RBI will allow this facility for bullion trade.
• G7 countries have banned to import Russian Gold, other countries are in dilemma.
• None of the Indian banks are willing to import gold from Russia
• It’s highly unlikely that it will be extended to other countries. As other countries will not benefit from selling gold to India in Rupee terms.
While the change is expected to boost principally trade with Russia, it is also expected to assist curb dollar outflows and halt rupee devaluation to a very limited level.