The amendments to the Foreign Trade Policy (FTP) to facilitate settlement of international trade in Indian rupee is expected to provide greater flexibility to Indian exporters and their overseas trading partners in choosing the currency of invoicing and settlement, a senior official said on Friday.
The changes also support government’s broader efforts towards trade facilitation, reducing transaction frictions and encouraging greater use of rupee in international trade settlements, particularly where trading partners find it commercially convenient, he added.
The changes brought through a notification by the Directorate General of Foreign Trade (DGFT) align the FTP provisions with the prevailing framework under the Foreign Exchange Management Act (FEMA).
The government had first allowed international trade settlement in rupee in November 2022 by enabling invoicing, payment, and settlement of exports and imports. This was in response to a steep jump in trade with Russia after the onset of the Ukraine war, when Russia became a significant supplier of crude oil. Even now, most of the rupee trade happens with Russia only.
“Once sanctions on Russia go this trade could also go and Russia may start asking for international currency for its goods,” an exporter who did not wish to be named said.
Officials, however, concede that use of rupee in international trade settlement would happen slowly and would not happen beyond a point. Also, it would have to be a two way trade — both exports and imports — in India rupee for growing and sustaining it.
A significant feature of the amendment applicable from Thursday is that exports to any country, other than Nepal and Bhutan, where export proceeds are realised in rupee through prescribed banking channels, will be eligible for export benefits/incentives and fulfilment of export obligations under the FTP, at par with exports whose proceeds are realised in foreign currency.
Export obligations stem from benefits exporters avail under schemes like Export Promotion Capital Goods Scheme and Advance Authorisation that allow for duty free import of inputs and capital goods but come with obligation to export goods made using these inputs.
Steps required for rupee internationalisation
Experts, however, say that a lot of groundwork is needed to facilitate international trade in Indian currency. Because the rupee is not convertible in current account, overseas banking institutions do not hold it, so would not be able to provide it to importers, engineering goods exporter and owner of Geco Trading’s CEO Khalid Khan said.
Even if importers arrange rupees from some banks, who do hold the Indian currency, the costs would be very high. Moreover, exporters would continue to receive payments in international currencies to benefit from depreciating currency while hedging their receivables through forward contracts or options, he added.
For greater use of local currency in international trade, India would have to enter into bilateral arrangements with its key trade partners or a group of countries like members of BRICS will have to get together to work out a mechanism that smoothens the process, Global Trade Research Initiative (GTRI) founder Ajay Srivastava said.
The China model
Another option is to follow what China has done in internationalising yuan, he said. People’s Bank of China (PBOC) – the central bank – maintains swap agreements with over 40 central banks. These lines allow foreign central banks to provide offshore renminbi RMB liquidity to local banks to finance imports from China without converting through US dollars.
China also has the Cross-Border Interbank Payment System (CIPS) which serves as the primary clearing and settlement architecture for cross-border yuan transactions.
Officials, however, concede that use of Indian rupee in international trade settlement would happen slowly and would not happen beyond a point.
