Rupee-based trade: India pushes Rupee trade beyond Russia

Source: The post is based on the article “India pushes Rupee trade beyond Russia” published in The Hindu on 9th November 2022.

What is the News?

On the lines of an arrangement being worked out with Russia, India is in talks with Sri Lanka, the Maldives and multiple South East Asian, African and Latin American countries to initiate trading in the Indian Rupee.

About overseas Trade in Indian Rupee 

The Reserve Bank of India announced guidelines on overseas trade in Indian Rupee in July 2022.

This is aimed at curtailing India’s dollar dependence on trade and indirectly strengthening the domestic currency.

The first country to open a special Rupee Vostro account is Russia which has increased the supply of discounted crude to India post the Ukraine war.

Note: A Vostro account is an account held by a bank that allows customers to deposit money on behalf of another bank.

How does the rupee-based trade work?

Under the Indian rupee arrangement, banks in India will open Vostro accounts (an account that an Indian bank will hold on behalf of another bank) of correspondent bank/s of the partner country for trading. 

Indian importers can pay for their imports in rupees into these accounts. These earnings (from Indian imports) can then be used to pay Indian exporters in Indian Rupee. 

Unlike regular Vostro accounts, INR (Indian Rupee) balances can be held in these Special Vostro Accounts rather than them being only transit accounts like normal Vostro accounts.

Is rupee-based trade feasible in the long run?

Any rupee trade arrangement between India and a country which has a trade deficit with India, may not be feasible in the long run. 

Russia is an exception in this case since the country is under sanctions and could use the Indian rupee to invest here to fulfil their offset obligations under defence contracts.