New Delhi: Sanctions-hit Russia is looking to settle its oil sales to India in rupees by involving the UAE, two people aware of the proposal said.
New Delhi: Sanctions-hit Russia is looking to settle its oil sales to India in rupees by involving the UAE, two people aware of the proposal said.
The rupee settlement mechanism continues to face major roadblocks with little or no trade taking place in the domestic currency. This is in spite of the fact that banks from 18 countries have been permitted by the Reserve Bank of India (RBI) to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian rupees.
The rupee settlement mechanism continues to face major roadblocks with little or no trade taking place in the domestic currency. This is in spite of the fact that banks from 18 countries have been permitted by the Reserve Bank of India (RBI) to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian rupees.
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The Russian idea is to break this stalemate through a three-way payment mechanism, which works in the following way: Russia sells oil to India in rupees; India makes the rupee payment to the UAE; and Russia then buys UAE goods or services against that payment.
“Russia is looking to settle trade in rupee with India via UAE since India is importing from UAE too. The thought is why not allow the rupee with Russia to be liquidated against supply from UAE,” a person aware of the development said on condition of anonymity.
However, the person quoted above added that even India exporters prefer foreign currency at the moment as they receive a forward premium — where the expected future price of a currency is greater than the spot price.
Some experts said the three-way settlement works better in theory than in practice.
“The moment you get into rupee currency settlement, say rupee-rouble trade, it is unlikely to work because of the fact that we import more from Russia than we export. Therefore, any two countries looking to trade in non-strong currency could work if you are re-routing through a third country. But all these transactions can work to the extent that payments can be used by the second country to deal with the third country. If we give a lot of rupee to Russia they wouldn’t know what to do with it unless they are able to use that via a third country [UAE]. And UAE uses rupee to import something from India,” said Madan Sabnavis – chief economist, Bank of Baroda.
Sunitha Raju – professor – Indian Institute of Foreign Trade said that arrangement between Russia and the UAE can be a possibility only if India’s trade deficit with the UAE turns surplus.
Sabnavis, however, added that most of India’s exports are going to the European Union and the US.
Mint had reported that India and the UAE are also discussing using the rupee settlement mechanism for trade. The UAE is India’s third-largest trade partner after the US and China.
Meanwhile India is also planning to incentivise rupee settlement mechanisms. Mint had reported that the foreign trade policy (FTP) will be amended to enable exporters to claim export benefits for settling trade in rupees.
Queries sent to commerce ministry, Reserve Bank of India, Russian embassy in India and UAE’s embassy in India remained unanswered till press time.
Currently, incentives to exporters in the form of duty drawbacks, export promotion capital goods (EPCG) incentives, and rebates on duties and taxes under different government schemes like Rebate of State and Central Taxes and Levies (ROSCTL) and Remission of Duties and Taxes on Export Products (RODTEP) are available only if payments or export realizations come in freely convertible currencies including the dollar, British pound, euro and yen.
A government official told Mint that trade settlement in rupee will be incentivised till the time banks have enough volume of trade and the exporters find it cheaper to settle in rupee.
Experts meanwhile said that there are multiple challenges in the rupee settlement mechanism, preliminary to the exchange rate volatility and trade deficit that India has with most countries.
“About a third of India’s export proceeds are realized by an American bank. So it’s doubtful if they would aid settlement using other mechanisms. The banks will have to be brought on board and they will have to come out with a simple to understand instruction. That is missing. Stability of currency is another crucial factor for the mechanism. Dollar is preferred at the moment because there is global acceptability and stability of the currency,” former Indian Trade Service officer and founder of Global Trade Research Initiative (GTRI) said.
As per data presented in the Parliament on 14 March, RBI has approved domestic and foreign authorized dealer banks in 60 cases for opening of special rupee vostro accounts (SRVAs) of correspondent banks from 18 countries.
These include Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom, junior finance minister Bhagwat Karad said in the Rajya Sabha.
Under the mechanism, Indian importers will make payments in rupees that will be credited to the vostro account of the correspondent bank of the partner country. Similarly, Indian exporters will be paid the proceeds in rupees from the balances in the vostro account. RBI has allowed the surplus rupee balance in these accounts to be used for payments for projects and investments, export, import advance flow management, and investments in government securities.
