Rupee trade cannot afford government speed breakers. RBI also has to deal with a hitch
Jhe Reserve Bank of India’s decision to allow all cross-border transactions such as imports and exports to be denominated and charged in Indian Rupee is a groundbreaking move. This can be a springboard for India’s economy to take a quantum leap. In one go, the RBI tried to do a lot. It is up to industry and trade bodies as well as countless – and faceless – bureaucrats and bankers to carry the arrangements to their logical conclusions.
India can now do business with countries in the region and beyond with willing partners without fear of exchange rate pressures and losses. According to trade experts, the net annual savings could reach $30 billion to $40 billion. The big “if” is that it should be implemented and used without creating speed bumps, both by users and the government.
The exchange rate between currencies can be determined by the prevailing market rate. Suppose that a large part of India’s trade with a country with a stronger currency, say Russia, is settled according to the provisions of this scheme. The net trade balance will remain in an Indian bank in Indian rupees in the account of a Russian bank. This trade surplus is India’s trade deficit, but the other country’s surplus can be invested in Indian government bonds and securities.
Authorized dealer banks are now allowed to open vostro accounts for the settlement of trade accounts with the bank of cross-border trading partners. Funds in a vostro account (literally “your account”) held in the name of an Indian bank for its client become the facilitator of settlement in INR.
Usually, banks provide these services, but in the currency of the other country. The exchange rate is determined by a common currency, i.e. the dollar, which fluctuates and results in a 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 trade safely and without losing precious foreign currencies, in the case of India, US dollars.
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Past efforts have been unsuccessful
An arrangement like this is not new. New Delhi reached this agreement with Iran in 2012 following the sanctions. The India-Iran Memorandum of Understanding enabled Indian banks (in this case UCO Bank) in Iran to facilitate trade settlements through similar vostro accounts. US sanctions forced the RBI to withdraw the Asian Clearing Union (ACU) mechanism, ending all trade and banking transactions in 2010. Apparently under pressure from the US, European banks also sought details on individual transactions while offsetting ACU regulations to screen Iranian transactions. This was not possible as the settlements were on a net basis, settled every two months. Meanwhile, the then US president dangled the carrot of “permanent seat at the UNSC” in front of India during his visit.
The MoU made banking easier (between UCO Bank and Iran’s Parsian Bank), but business circles on both sides called for more banks to be included. India has established the Export Credit Guarantee Corporation (ECGC) to provide insurance cover to banks to cover payment risks. Again, exorbitant bank charges hampered trade. Yet another problem was the blacklisting of Indian banks and commercial entities doing business with Iran by the US government. Many traders had to register new offshore companies to do business with Iran.
The geopolitical situation has since changed radically. Far from hampering Indian banks, the EU is even changing sanctions provisions to unfreeze some funds from major Russian banks and allow food exports from Russian ports. In such a situation, New Delhi’s policy towards the Russian-Ukrainian conflict and the need to ensure energy security were justified. It was about overcoming the obstacles resulting from the sanctions.
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Fine print still to be written
While the RBI mechanism will solve some problems, there is no guarantee that the current mechanism will be able to circumvent all payment problems, whether with Iran or with Russia. As soon as possible, the government should come up with policies to address these issues. Also, the RBI Circular has yet to define the rules and regulations of the arrangement. Obviously the fine print of the arrangement could have more conditions and checks and balances to prevent fraudulent transactions and tax evaders from taking unfair advantage of the provisions.
Clause 10 of the circular requires the bank in the partner country to approach a licensed concessionary bank in India for the opening of an INR vostro special account. The licensed dealer bank should then seek approval from the RBI with the details of the arrangement. This is where the hitch is. There could be hundreds of thousands of transactions reaching millions of rupees once trade picks up again. The “request for approval” will involve a complex process of reviewing each case for weeks or even months, with no guarantee of approval.
A simpler procedure would be to allow licensed concession banks to notify the RBI and allow trade settlements to proceed unimpeded. Any violations of tax laws and security aspects detected later should be severely punished and licensed concessionary companies and banks should be blacklisted. In fact, the Financial Action Task Force (FATF) has recognized more than twenty-three countries as high-risk jurisdictions where the RBI provisions of trade regulations will not apply.
These are undoubtedly difficult times for cross-border trade. Therefore, it is all the more important that government, trade bodies, chambers of commerce and business and the banking industry come together to find a solution that captures the spirit of the ease of doing business in its true meaning.
The author is the former editor of ‘Organise’. He tweets @seshadrichari. Views are personal.
(Edited by Prashant)