Amendment in Foreign Trade Policy

Description

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Context

The Government of India has made suitable amendments in the Foreign Trade Policy to allow for rupeesettlement of international trade for export promotion schemes.

Amendment

It has made an amendment in Foreign Trade policy to allow for International Trade Settlement in Indian Rupees (INR) i.e., invoicing, payment, and settlement of exports/imports in Indian Rupees.
The changes meanbenefits, incentives, and fulfillment of the export obligations under the Foreign Trade Policy can be extended to export payments made in Indian rupees, as outlined by the Reserve Bank of India (RBI).

Mechanism

RBI announced the setting up of a mechanismto settle global trade in rupees. Under the mechanism, all exports and imports may be denominated and invoiced in rupees, with the exchange rate between the currencies of the two trading partner countries to be market determined.
To settle these transactions, authorized Indian banks have to open Special Rupee Vostro Accountsof correspondent banks of the partner trading country.

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Rupee Vostro Account

Simply put, Rupee Vostro Accounts keep the foreign entity's holdings in the Indian bank, in Indian rupees. When an Indian importer wants to make a payment to a foreign trader in rupees, the amount will be credited to this Vostro account. Similarly, when an Indian exporter has to be paid for goods and services in rupees, this Vostro account will be deducted and amount credited to the exporter's regular account.

Reason behind Amendment

The move to allow the settlement of trade in Indian rupees came amid increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine.
Given the rise in interest in the internationalization of the Indian rupee, policy amendments have been undertaken to facilitate and bring ease in international trade transactions in Indian rupees.
The changes have now been introduced for granting export benefits and incentives as well as Fulfilment of Export Obligation norms for importers, for export realizations made in Indian rupees.
The move was aimed to boost global tradewith a focus on shipments from India and supporting the interests of the global trading community in Indian currency.

Significance

Allowing trade settlements in the rupee under the various export promotion schemes should help boost exports and signals ‘internationalisation of the domestic currency’. These are early steps towards 100% convertibility of the Indian rupee.

https://www.thehindu.com/business/rupee-denominated-trade-made-eligible-for-export-promotion-obligation-schemes/article66116409.ece

https://www.pgurus.com/centre-amends-foreign-trade-policy-allows-rupee-settlement-in-export-promotion-schemes/