RUPEE SETTLEMENT SYSTEM FOR INTERNATIONAL TRADE

Disclaimer: Copyright infringement not intended.

In News

• The Reserve Bank of India (RBI) said that it is putting in place a mechanism to settle international trade in rupees.
• The decision comes after major Russian banks were removed from the international financial messaging system Swift, making it harder for India to trade with Russia.
• Thus, the rupee settlement system for international trade will be an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.

Objective

• The aim is to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in Indian Rupee.

Mechanism

• For settlement of trade transactions, the concerned banks will require Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
• Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country. This payment would be against the invoices for the supply of goods or services from the overseas seller /supplier.
• Exporters, undertaking overseas shipments of goods and services through this mechanism, will be paid the export proceeds in Indian rupees from the balances in the designated Special Vostro account.
• This mechanism may enable Indian exporters to receive advance payment against exports from overseas importers in rupees.

Note: The balance in special vostro accounts can be used for payments for projects and investments; export/import advance flow management; and investment in government bonds.

What is SWIFT?

• The SWIFT system stands for the Society for Worldwide Interbank Financial Telecommunication.
• The SWIFT messaging network is a component of the global payments system.
• Its principal function is to serve as the main messaging network through which international payments are initiated.
• Established in 1973, it is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers.
• SWIFT acts as a carrier of the "messages containing the payment instructions between financial institutions involved in a transaction."
• Thus, SWIFT does not actually move money, but it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
• Based in Belgium, it is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.

Note: SWIFT does not manage accounts on behalf of individuals or financial institutions. Also, it does not hold funds from third parties. It also does not perform clearing or settlement functions.

https://indianexpress.com/article/business/economy/rbi-paves-way-for-global-trade-settlement-in-rupee-8023456/