While many businesses – driven by commercial convenience, balance of payments, and terms of global reinsurers – often prefer to deal in hard, convertible currencies, New Delhi is pursuing its aim to internationalise the local currency. The Directorate General of Foreign Trade (DGFT) under the ministry of commerce and industry has asked the banking industry body to advise all banks to “conduct outreach programmes with the international trading community to promote trade in special rupee vostro account (SRVA)”.
SRVA is an account opened by a foreign bank (representing overseas trading partners) with an authorised dealer bank in India. On July 11, 2022, the RBI while announcing the settlement of international trade in rupee through SRVAs allowed the deployment of the surplus balance in such accounts in government of India bonds and Treasury Bills. According to the communication from DGFT, banks have to submit a report highlighting specific issues in international trade settlement in rupee, an industry person told ET.
Till now, banks have discussed the SRVA mechanism with delegations from Russia, Belarus, Cuba, Tajikistan, Luxembourg and Sudan. While a string of overseas banks have opened SRVAs with Indian lenders, the volumes of trade settlement in rupee is yet to pick up.
Besides developments like China’s efforts to make the yuan a global currency and the difficulties faced by some of the countries to deal in dollars, the push towards internationalising rupee may well be part of a long-term plan, stemming from a belief that a country has a greater manoeuvrability in trade if the currency of invoice is same as the local currency. One of the benefits is saving on the cost hedging against fluctuation in foreign exchange rates.
The central bank’s July 2022 directive came less than six months after the Russian invasion of Ukraine which led to several Russian financial institutions getting barred from using SWIFT, the internal messaging system which is widely used to facilitate and confirm cross-border payments.
“Most Russian companies want to be paid in dollars, yuan or UAE dirham as the exchange of unused rupee balance in Vostro accounts is difficult. Companies importing oil are largely paying in dollars, with Indian banks ready to handle the payment as long as the price of oil (from Russia) is below $60… Banks may reach out to exporters and importers, but beyond a point they can’t do much if the trade balance is skewed with imports far exceeding exports (as is the case with Russia),” said a trader.
Since most Indian insurers are unwilling to cover imports from Russia due to the reluctance of western reinsurance giants, often the cargoes are being insured by Russian insurance companies with the premium amount added to the total price of import, said an importer.
“Our experience is that Indian banks, particularly those with US operations, do not want to handle payments in yuan or even dirham in a sustained manner for trades linked to Russia. They fear it could be construed as a way to sidestep the sanctions,” said the person. Unlike rupee, Russia has no problem receiving yuan as there is a large two-way trade with China.
Interestingly, the current attempts to internationalise the rupee comes at a time when the central bank has been taking measures that would discourage outflow of capital. “So, promotion of rupee for invoicing and trade settlement relates to ‘current account’ transactions. But on the ‘capital account’, outflow is becoming tougher,” said an economist with a large brokerage.