DGFT pushes banks to settle foreign trade in rupee

It’s an economic dream that might be at the core of the resurgent India plan of the government. In a bid to internationalise use of the Indian rupee, the government is asking banks to push for settlement of trade beyond the country’s border in the Indian currency, The Economic Times has reported.

The push has come from the Directorate General of Foreign Trade (DGFT) which functions under the Union ministry of commerce and industry. It has urged the banking industry to “conduct outreach programmes with the international trading community to promote trade in special rupee vostro account”. The DGFT has also told banks to come up with a report flagging the specific issues in cross-border trade settlement in the Indian currency.

A vostro account is maintained by a domestic bank for a foreign bank. It is denominated in the domestic currency of the former bank. Accordingly, rupee vostro accounts are held by Indian banks in rupees for foreign banks.

Local banks to gain

This manner of banking is a type of correspondent banking where a bank can carry out wire transfers, conduct business transactions and deposit funds on behalf of another bank. A direct benefit of this system is that it enables domestic banks to access financial markets abroad and cater to the needs of global clients without having an office/branch abroad. On April 2, 2023, public sector Union Bank of India became the first Indian bank to open a special rupee vostro account through its corresponding bank in Malaysia (India International Bank of Malaysia), Mint had reported.

Vostro accounts
On July 22 last year, Reserve Bank of India announced the settlement of international trade in rupee through Special rupee vostro accounts. It also allowed the deployment of surplus balance in these accounts in Govt of India bonds and treasury bills.

ET says that banks have so far discussed the rupee vostro accounts with Russia, Belarus, Cuba, Tajikistan, Sudan and Luxembourg. Several foreign banks have also opened vostro accounts with Indian banks. However, the amount of trade being settled in Indian rupees is very slim.

In a sense, the entire process for a shot in the arm following Russia’s invasion of Ukraine. After Putin’s country was debarred from the international system for cross border payments SWIFT (as a punitive measure by the West), RBI sent out its message to push settlement of global trade in July.

War affect
“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 cannot do much if the trade balance is skewed with imports far exceeding exports (as is the case with Russia),” said a trader.

Importantly, most Indian insurers are reluctant to provide cover for imports from Russia since western companies that reinsure such cover are not willing to do business with Russian agencies. Therefore, the cargo is insured by Russian insurance companies with the premium raising the cost of import.

“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,” the trader told ET.”
Russian entities do not resist being paid in yuan since they have a large two-way trade with China.