Enhancing Rupee-Based Trade Settlements: RBI Initiatives

RBI’s Move to Promote Rupee-Based Trade Settlements

The Reserve Bank of India (RBI) is taking steps to strengthen the global role of the Indian rupee in cross-border trade. By introducing new Reference Rates, empowering authorized dealer banks, and widening the scope of Special Rupee Vostro Accounts (SRVA), India aims to make rupee settlements more attractive and reduce dependence on the US dollar.

Main Provisions

Reference Rates via FBIL

Financial Benchmarks India Ltd (FBIL) already publishes daily reference rates for major currencies like USD, euro, pound, and yen. RBI has asked FBIL to add reference rates for India’s other large trading partners.

Example: Instead of converting Indonesian Rupiah to USD and then to INR, traders can directly use INR–IDR rates published by FBIL.

Role of Authorized Dealer (AD) Banks

Authorized Dealer Banks are commercial banks licensed by RBI under the Foreign Exchange Management Act (FEMA) to handle foreign currency transactions. They manage rupee trade settlements, foreign remittances, forex cards, and SRVA accounts.

Example: SBI, HDFC Bank, or ICICI Bank can act as AD banks to settle India–Sri Lanka trade directly in rupees.

Rupee Loans to Neighbouring Countries

AD banks and their overseas branches can lend in rupees to residents and banks in Bhutan, Nepal, and Sri Lanka. Example: A Sri Lankan importer of Indian steel can borrow rupees from SBI Colombo branch and settle trade without needing US dollars.

Special Rupee Vostro Accounts (SRVA)

A Vostro Account is an account a foreign bank holds with an Indian bank in rupees. SRVA allows foreign banks to receive, hold, and use rupee balances for trade and investment.

How SRVA Works Step by Step

1. A foreign bank opens an SRVA in rupees with an Indian AD bank (e.g., SBI).

2. An Indian importer buys Russian oil worth ₹1,000 crore. Instead of paying in USD, rupees are credited to the Russian bank’s SRVA.

3. The foreign bank can then use those rupees to:

• Pay for imports from India (e.g., Russian companies buy Indian medicines).
• Invest in Indian government securities or corporate bonds (as allowed by RBI in October 2025).
• Pay for services within India linked to trade (like port and logistics fees).

Why SRVA Matters

- For India: Reduces demand for US dollars, strengthens the rupee’s role.

- For Partners: Economies with dollar shortages (like Sri Lanka) can trade with India in rupees.

- For Banks: Provides a safe, regulated channel under RBI supervision.

Expected Benefits

- Reduced Dollar Dependence: Less exposure to dollar fluctuations and crises.

- Lower Transaction Costs: Direct FBIL reference rates avoid multiple conversions.

- Liquidity for Neighbours: Bhutan, Nepal, and Sri Lanka gain easier access to rupees.

- Wider Investment Options: SRVA balances can now be productively invested.

- Gradual Rupee Internationalisation: Strengthens India’s economic diplomacy.

Practical Examples

India–Sri Lanka Trade: Earlier, Sri Lanka paid in USD for Indian petroleum. Now, using SBI as an AD bank, payment can be made in INR at the FBIL-published INR–LKR rate.

India–Russia Oil Trade: Russia exports oil worth ₹1,000 crore. Payment is made in rupees into an SRVA. Russian banks then use the rupees to import Indian goods or invest in Indian bonds.

Bhutan’s Hydropower Trade: Bhutan sells hydropower to India. Rupees are credited into Bhutan’s SRVA account, then used to pay for Indian goods and services.

Limitations

- Global Acceptance is Limited: Rupee is not yet fully convertible.

- Slow Transition: Internationalisation of the rupee will be a decade-long journey.

- Reliance on AD Banks and FBIL: Smooth settlements require active participation by Indian banks and accurate FBIL rate-setting.

Synopsis

The RBI’s strategy—expanding FBIL’s role in setting exchange rates, empowering authorized dealer banks, and broadening SRVA usage—marks a significant step in promoting rupee-based trade. It reduces costs, provides dollar alternatives to neighbours, and slowly builds the rupee’s global standing. However, this is a long-term process requiring trust and wider acceptance.