RBI sets up rupee payment mechanism for global trade

However, RBI said authorised foreign exchange dealer banks require prior approval from its Foreign Exchange Department before putting in place this mechanism.

RBI has also notified the broad framework for cross-border trade transactions in rupee under Foreign Exchange Management Act, 1999 (FEMA).

Accordingly, all exports and imports under this arrangement may be denominated and invoiced in rupee.

Exchange rate between the currencies of the two trading partner countries may be market determined.

The settlement of trade transactions under this arrangement should also be in Indian rupees, in accordance with the procedure laid down in the RBI circular.

In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD banks in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country in order to allow settlement of international trade transactions through this arrangement.

Indian importers undertaking imports through this mechanism should make payment in rupee, which will 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.

Indian exporters, undertaking exports of goods and services using this mechanism, will be paid the export proceeds in rupee from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

The export / import undertaken and settled in this manner will be subject to usual documentation and reporting requirements. Letter of Credit (LC) and other trade related documentation may be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms, the notification says, adding that the exchange of messages in safe, secure, and efficient way may be agreed mutually between the banks of partner countries.

Indian exporters may receive advance payment against exports from overseas importers in rupee through the Rupee Payment Mechanism. Before allowing any such receipt of advance payment against exports, Indian banks should ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline. Such permission would be in accordance with the conditions of advance against exports mentioned in the Master Direction on Export of Goods and Services 2016 (as amended from time to time). In order to ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro account of its correspondent bank should, apart from usual due diligence measures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance.

The mechanism allows ‘set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with facility to make/receive payment of the balance of export receivables/import payables, if any, subject to the conditions for set-off of export receivables against import payables under Master Direction on Export of Goods and Services.

Issue of bank guarantee for trade transactions, undertaken through this arrangement, is permitted subject to adherence to provisions of FEMA regulations and the provisions of Master Direction on Guarantees & Co-acceptances.

The rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in Special Vostro Accounts can be used for: Payments for projects and investments; Export/Import advance flow management or Investment in government treasury bills, government securities etc in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provision.

Reporting of cross- border transactions have to be done in terms of the extant guidelines under FEMA 1999.

The bank of a partner country may approach an AD bank in India for opening of Special Rupee Vostro account. The AD bank may seek approval from the RBI with details of the arrangement. AD bank maintaining the special Vostro Account should ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Co-operative Jurisdictions on which FATF has called for counter measures.

RBI said the instructions will come into force with immediate effect and has asked AD banks to bring the contents of the circular to the notice of their constituents and customers concerned.