Crisis-hit Sri Lanka and Russia will be the first countries to use the Indian rupee trade settlement mechanism. This allows countries to use Indian rupees instead of dollars and other major currencies for International transactions. The Reserve Bank of India (RBI) has approved banks to open 5 special rupee trading accounts, called Vostro accounts, for trade with Sri Lanka through the Indian rupee trade settlement mechanism.
Similarly, the RBI has given approval to banks to open 12 ‘Vostro’ for trade in rupees with Russia. The move assumes significance amid a widening trade gap between Russia and India. While Russia has swiftly become India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the lack of a smooth payment mechanism.
Sources in the GOI have said that the government is looking to bring more countries that are short of dollars into the rupee trade settlement mechanism. Another account for trade with Mauritius has also been authorized by the RBI, which set up the instrument in July. Countries such as Tajikistan, Cuba, Luxembourg and Sudan, too, are reportedly in talks about using the rupee settlement mechanism.
After opening Vostro accounts, Sri Lankan citizens can now hold $10,000 in physical form. This also means that Sri Lankans and Indians can use Indian rupees instead of US dollars for international transactions with each other. The Indian government since July this year, has been looking to bring countries that are short of dollars, into its rupee settlement mechanism.
Designating the rupee as a legal currency in Sri Lanka will provide the country with much-needed liquidity support to help it tide over its economic crisis amid the inadequate availability of the dollar. The country’s economy is more likely to prevent further intensifying the balance of payments crisis when the investors begin selling off in domestic currency.
Indian importers using this mechanism need to make payment in rupees which must be credited into the Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller or supplier. Similarly, Indian exporters using this mechanism must be paid the export proceeds in rupees from the balance in a designated Vostro account of the correspondent bank of the partner country.