In terms of existing provision of the Foreign Exchange Management Act, 1999 (‘FEMA’), Indian Rupee is not a freely convertible currency.
The Reserve Bank of India (RBI) vide Circular No. 10 dated July 11, 2022, has permitted international trade invoices and payments and settlements of exports/import to be made in Indian Rupees (INR) for encouraging trade as under:
- Indian importers shall now make payments in Indian Rupees, to be credited to the Special Indian Rupee Vostro Account of the correspondent bank of the partner country.
- In case of exports, Indian exporters shall be paid the export proceeds in INR from the balances in the partner country’s designated Vostro account.
The Circular has laid down the mechanism cross border trade transactions in INR, which is described as under:
- The export/import undertaken and settled shall be subject to usual documentation and reporting requirements. Letter of Credit (LC) and other trade related documentation to be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms.
- Indian exporters can also receive advance payment against exports from overseas importers in Indian rupees. Before allowing any receipt of such advance payment, Indian Banks shall ensure that available funds in accounts are first used towards payment obligations arising out of already executed export orders / export payments in the pipeline.
- In order to ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro account of its correspondent bank, shall verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance.
- Facility of ‘Set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier allowed subject to specified conditions.
- Issue of Bank Guarantee for trade transactions, undertaken through such arrangement is permitted subject to adherence to provisions under FEMA read with the updated Notifications.
- Rupee surplus balance held may be used for permissible capital and current account transactions.
- Reporting of cross-border transactions required to be done in terms of the guidelines under FEMA.
- Bank of a partner country can approach an Authorized Dealers (‘AD’) bank in India for opening of Special INR VOSTRO account. AD bank shall seek approval from the RBI with details of the arrangement. AD bank maintaining the special Vostro Account shall ensure that the correspondent bank is not from a country or jurisdiction in the updated Financial Action Task Force(‘FATF’), Public Statement on High Risk and Non-Co-operative Jurisdictions on which FATF has called for counter measures.