The Reserve Bank of India had announced a new payment mechanism for international trade. This payment mechanism will make Indian Rupee more tradeable. It also will reduce dependency on the US dollar.
The new settlement system will help to check dollar outflow and will minimize depreciation of rupees. There are sanctions on Russia, it cannot use the swift system of payment for international trade. This new system will help both Russia and India in their trading. As per the new system the invoicing, Payment and settlement of import and export will be done in Indian Rupees.
New mechanism of Rupee Ruble system of payment for trade
To settle international trade transactions, Indian banks will open Vostro accounts of correspondent banks of the partner country particularly for trading. For Indian import, Indian company will pay in Rupees into these Vostro accounts. For Indian export, Russian party will use the earnings of the Vostro account to pay the Indian exporter in rupees. The regulation allows the Indian exporters to receive advance payment against their exports from the overseas importers in rupee. It will internationalize our local currency and the acceptance of the Indian rupee will increase significantly. This particular type of payment settlement procedure will be used with countries like Russia and Iran. As they are facing US economic sanctions, they cannot use the US dollar or the SWIFT payment system for international trade. As per the Reserve Bank of India, exchange rate of the currencies will be market-determined.
What is Swift Payment system?
Presently, transactions for exports or imports are done in a foreign currency. Indian companies have to pay in foreign currency for imports. India mainly uses US Dollar for payment and sometimes Pound and Euro. In time of exports Indian companies are paid in foreign currency, mainly in US Dollar which they again have to convert in Rupees.
But after the sanctions imposed on Russia, The US and European Commission have excluded Russian banks from the SWIFT system (Society for Worldwide Interbank Financial Telecommunication). Banning a bank from SWIFT will obstruct the bank from executing its and its customers’ financial transactions with foreign nations like receiving payment for exports and providing credit for imports. Russia’s internal transactions and payment system can also be disrupted as the major credit card networks like VISA, Mastercard, Amex, etc. are being operated through the SWIFT system.
Trade between India and Russia will hit hard as Russian banks are excluded from the SWIFT system. India can not engage in bilateral trade with Russia using foreign currency because of the economic sanctions on Russia. India mainly imports petroleum products, diamonds and fertilizers from Russia.
How can this benefit India? Why RBI introducing this payment system?
It will help to tackle India’s trade deficit. Actually, India imports more than it exports. That’s why under this new settlement system, India will save foreign currency. India used to pay in Dollars for Russian oil purchase. But after adopting this system, India will pay in Rupee Ruble route. This will give more flexibility to both the importer and exporter.
After imposing economic sanctions, trade with Russia hit hard because of payment problems. After this new payment system Indian exporters can easily settle the payments. The new system will reduce forex fluctuation as per Engineering Export Promotion Council chairman Mahesh Desai. The Federation of Indian Export Organization has suggested to the Government of India to identify at least five banks through which exporters of both countries can settle payment through this new mechanism.
Conclusion
Russia is India’s vital strategic partner and supplier of weapons. India need modern weapons to tackle border disputes with China and cross border terrorism from Pakistan. That’s why purchasing defense equipments from Russia is important, like the recent purchase of the S-400 missile defense system.
We can say that it is a very progressive step taken by the Reserve Bank of India. But we must not forget that trading by this new mechanism with sanctioned Russia can provoke the west. We also should not forget that, US is India’s biggest export market. In the last financial year India-US trade was $112.6 Billion. In the case of Russia this figure is very low. India had exported goods worth $3.3 Billion in the last financial year to Russia.
But still we should not forget our historical good relation with Russia. Several times Russia has saved us in the United Nations security council using its veto power. Russia had helped us by supplying arms. India still use many military equipment of Soviet origin. India had abstained from voting in UN for Russia’s invasion in Ukraine. But no doubt this new settlement system will internationalize our currency and will promote trade with foreign countries. It will break the dollar dominating monopoly in foreign trade.
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