{"id":208855,"date":"2022-09-30T20:44:55","date_gmt":"2022-09-30T15:14:55","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=208855"},"modified":"2022-09-30T20:44:55","modified_gmt":"2022-09-30T15:14:55","slug":"rupee-trade-settlement-offers-india-structural-benefits","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rupee-trade-settlement-offers-india-structural-benefits\/","title":{"rendered":"Rupee trade settlement offers India structural benefits"},"content":{"rendered":"\n

Source<\/strong>: The post is based on an article\u00a0\u201cRupee trade settlement offers India structural benefits\u201d\u00a0published in\u00a0Live Mint <\/strong>on 30th<\/sup> September 2022<\/strong>.<\/p>\n

Syllabus: GS 3<\/strong><\/p>\n

Relevance:\u00a0<\/strong>measures taken by the RBI to tackle falling rupee<\/p>\n

News<\/strong>: RBI has taken a decision recently to let domestic exim traders facilitate and settle invoicing and payments for international trade in rupees.<\/p>\n

This is a welcome step as it will reduce India\u2019s trade deficit and India can more easily raise its proportion of Russian oil purchases at discount prices.<\/p>\n

How is this measure helpful?<\/strong><\/h5>\n

It is a departure from the long-standing Foreign Exchange Management Act provision mandating final settlement in free foreign exchange.<\/p>\n

It would need foreign banks opening Vostro accounts in India with settlements taking place instantly. It would further allow Indian exim dealers to settle rupee-denominated trade invoices using these Vostro accounts.<\/p>\n

It also provides the parties with some leeway by allowing advance flow management.<\/p>\n

It is done by using excess rupee balances for permissible capital and current account transactions in accordance with mutual agreements.<\/p>\n

The provision for opening bank accounts in the case of Russia is limited to Russian banks that are not on the US-Office of Foreign Assets Control (OFAC) sanctions list.<\/p>\n

Therefore, this step has come as the rupee falls to historic lows versus the dollar.<\/p>\n

Why are the consequences of falling rupee?<\/strong><\/h5>\n

Imports:<\/strong> The sharp rise in global commodities, particularly oil imports have caused India\u2019s trade and current account deficits (CAD) to worrying levels.<\/p>\n

The current account deficit is expected to touch 3% of GDP in 2022-23 despite a record increase in exports.<\/p>\n

Inflation:<\/strong> A weakening rupee worsens the threat of imported inflation in India, since India is dependent on imports for about four-fifths of its annual motor-fuel demand.<\/p>\n

Therefore, this policy would lower demand for foreign exchange for the settlement of current account-related trade flows.<\/p>\n

Further this step taken by the RBI also has economic and geopolitical implications.<\/p>\n

How this measure has <\/strong>economic and geopolitical implications?<\/strong><\/h5>\n

First,<\/strong> it has liberalized capital account convertibility to decrease pressure on India\u2019s dollar reserves. Capital account flexibility diminishes the function in trade of currency reserves.<\/p>\n

Second,<\/strong> the move could assist Indian exporters in collecting advance payments in Indian rupees from overseas clients.<\/p>\n

Third,<\/strong> even if a Vostro account is not pre-funded, foreign importers will have to buy rupees. The rupee payment method can be used to set off export and import transactions.<\/p>\n

Fourth,<\/strong> the move could have a favourable long-term influence on regional nations wanting to trade with India.<\/p>\n

Moreover, the measure will also affect international politics.<\/p>\n

How will this measure affect international politics?<\/strong><\/h5>\n

First,<\/strong> it signals the beginning of more concerted attempts to settle payments in non-dollar currencies among BRICS nation and with other South Asian countries.<\/p>\n

Second,<\/strong> it would support the Indian rupee\u2019s position on the internationally with China and Russia looking for alternative payment systems.<\/p>\n

Moreover, the US dollar holds importance around the globe including in India.<\/p>\n

How does US dollar hold importance around the globe and in India?<\/strong><\/h5>\n

Internationally:<\/strong> The US dollar is defined as Dominant Currency Paradigm\u2019 (DCP) which means the US dollar holds importance as the source, destination and vehicle currency.<\/p>\n

The DCP has affected national exchange-rate policies by emphasizing the stability of the US retail price index and input costs.<\/p>\n

According to estimates, the dollar\u2019s proportion of global invoices is currently 4.7 times more than its share of global imports.<\/p>\n

India:<\/strong> 60% of all export-import payments in India are made in US dollars (and 86% in the case of imports).<\/p>\n

The settlement at the sovereign level is carried out in dollars even if an Indian exporter is paid in rupees.<\/p>\n

Moreover, the rupee\u2019s current depreciation can be given to dollar strength globally.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article\u00a0\u201cRupee trade settlement offers India structural benefits\u201d\u00a0published in\u00a0Live Mint on 30th September 2022. Syllabus: GS 3 Relevance:\u00a0measures taken by the RBI to tackle falling rupee News: RBI has taken a decision recently to let domestic exim traders facilitate and settle invoicing and payments for international trade in rupees.… Continue reading Rupee trade settlement offers India structural benefits<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10501],"class_list":["post-208855","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-live-mint","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":1700789619,"cached_date":1704772052},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/208855","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=208855"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/208855\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=208855"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=208855"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=208855"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}