The Reserve Bank of India’s decision to allow all cross-border transactions such as imports and exports to be denominated and invoiced in Indian rupee is a path-breaking move. It can be a springboard for the Indian economy to make a quantum jump. In one go, the RBI has attempted to do many things. It is for the industry and trade bodies as well as the countless — and faceless — bureaucrats and bankers to take the provisions to their logical conclusions.
India can now do business with countries in the region and elsewhere too with willing partners without the fear of exchange rate pressure and loss. According to trade experts, the net annual savings could be as much as $30-40 billion. The big ‘if’ is that it should be implemented and used without creating speed breakers, both by the users and the government.
The exchange rate between the currencies can be determined by the prevailing market rate. Suppose a large amount of India’s trade with a country with a stronger currency, say Russia, is settled under the provisions of this scheme. The net trade balance will remain in an Indian bank in Indian rupees in a Russian bank’s account. This trade surplus is India’s trade deficit but the other country’s surplus can be invested in the Indian government bonds and securities.
The authorised dealer banks have now been permitted to open vostro accounts for settlement of trade accounts with the cross-border trading partners’ bank. The funds in a vostro account (literally “your account”) held on behalf of an Indian bank for its client becomes the facilitator for settlement in INR.
Usually, banks provide such services but in the currency of the other country. The exchange rate is determined by a common currency, that is dollar, which fluctuates and results in loss for the weaker currency. After the RBI circular, Indian exporters and/or importers can have their account debited or credited in INR. Given the volatile geopolitical dynamics and sanctions and countermeasures, there was an urgent need to conduct trade safely and without losing precious foreign exchange, in India’s case US dollars.
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Past efforts were unsuccessful
An arrangement such as this is not new. New Delhi entered into this arrangement with Iran in 2012 in the wake of sanctions. The memorandum of understanding (MoU) between India and Iran allowed Indian banks (in this case UCO Bank) in Iran to facilitate trade settlements through similar vostro accounts. The US sanctions compelled the RBI to withdraw the Asian Clearing Union (ACU) mechanism, bringing all trade and banking transactions to a complete halt in 2010. Ostensibly under US pressure, the European banks also sought details of individual transactions while clearing ACU settlements to filter Iranian transactions. This was not possible as settlements were on a net basis, settled every two months. Meanwhile, then-US president had dangled the ‘permanent seat in UNSC’ carrot before India during his visit.
The MoU facilitated banking operations (between UCO Bank and Iran’s Parsian Bank) but the business community on both sides called for more banks to be included. India came up with the Export Credit Guarantee Corporation (ECGC) to give insurance cover to the banks to cover payment risks. Again, exorbitant banking charges were a dampener to trading. Yet another issue was the blacklisting of Indian banks and business entities doing trade with Iran by the US government. Many traders had to register new off-shore companies to do business with Iran.
The geopolitical situation has undergone a radical change since then. Far from obstructing Indian banks, the EU is even amending sanctions provisions to de-freeze some funds of top Russian banks and allow export of food from Russian ports. In such a situation, New Delhi’s policy vis-à-vis Russia-Ukraine conflict and the need to secure energy security have been vindicated. The issue was to overcome the roadblocks arising out of sanctions.
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Fine print yet to be written
While the RBI mechanism will solve some problems, there is no guarantee that the present mechanism will be able to circumvent all payment issues either with Iran or with Russia. Sooner than later, the government should come out with policies to resolve these issues. Besides, the RBI circular is yet to frame the rules and regulations of the arrangement. It is evident that the fine print of the arrangement might have more conditions and checks and balances to avoid spurious transactions and tax evaders to take undue advantage of the provisions.
Clause 10 of the circular requires the bank of the partner country to approach an authorised dealer bank in India for opening a special INR vostro account. The authorised dealer bank is then expected to seek approval from the RBI with details of the arrangement. This is where the hitch is. There could be lakhs of transactions running into millions of rupees once the trade resumes in full swing. The ‘approval seeking’ will involve a complex procedure of examining each and every case for weeks or even months with no guarantee of approval.
A simpler procedure would be to allow the authorised dealer banks to inform the RBI and allow trade settlements to happen unhindered. Any contraventions of the tax laws and security aspects detected at a later stage should be punished severely and the firms and authorised dealer banks black-listed. In fact, the Financial Action Task Force (FATF) recognised more than twenty-three countries as high-risk jurisdictions where the RBI provisions of trade settlements will not be applicable.
These are difficult times for cross border trade, no doubt. Therefore, it is all the more important for the government, trade bodies, business and commerce chambers, and the banking industry to put their heads together to thrash out a solution that captures the spirit of ease of doing business in its true sense.
The author is the former editor of ‘Organiser’. He tweets @seshadrichari. Views are personal.
(Edited by Prashant)