Exporters awaiting more clarity on implementation of RBIs circular facilitating exim trade settlement in rupees

Mumbai, July 14, 2022:

Indian drug exporters are waiting for more clarity on the Reserve Bank of India (RBI)’s decision to allow trade settlements between India and other countries in rupees.

At first glance, the move clearly looks like it is aimed at facilitating smooth trade with sanction-hit Russia and forex-starved Sri Lanka.

However, drug makers having exposure to the Sri Lankan market are looking for more clarity on the new provision to settle exim trade in rupees.

Said Daara Patel, secretary general, Indian Drug Manufacturers’ Association (IDMA), “The State Bank of India (SBI) which signed agreement to provide USD 1 billion credit facility to Sri Lanka for procurement of food, medicines and other essential items, has not yet come out with a circular instructing bank to facilitate trade settlement with the island nation in rupees. On the other hand, Sri Lankan government also has not come out with notification in support of RBI’s new mechanism. Drugmakers exporting to Sri Lanka are awaiting clarity from SBI on the implementation of trade settlement with the island nation in rupees.”

Earlier IDMA urged the RBI to issue notification directing Indian banks to issue an agreement to exporters for realizing export proceeds in Indian rupees from Sri Lanka Bank as part of one billion US Dollar Line of Credit. Indian banks were reluctant to issue an agreement for receiving payment in Indian rupees from Sri Lanka bank by exporter’s bank and by exporter entity in absence of RBI circular.

Echoing Patel’s concern, Sandeep Modi, Joint Secretary, Federation of Pharmaceutical and Allied Products Merchant Exporters (FPME) said, “Many queries have been received for the RBI circular on rupees payment framework for exports and imports issued on July 11. We are of the view that exporters/importers must wait and not rush into any action based on the circular issued. There are several other details and challenges we need to examine. For instance, the Foreign Trade Policy must have clear corresponding provision in each of its incentives Schemes (AA, EPCG, RoDTEP), etc. for making the rupee proceeds received under the new framework be eligible for incentives. There needs to be clarity on customs notification in respect to claiming duty drawback benefit on those rupees receipts exports. RBI original Master Directions on Export of Goods and Services and Import of Goods and services must also have corresponding amendment.”

Chiming in with Modi, Nipun Jain, chairman, Small and Medium Pharma Manufacturers Association (SMPMA) said, “It seems that RBI’s move will help drugmakers exporting to countries facing forex shortage. More details on implementation of RBI circular are awaited.”

In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in rupees, the apex bank came out with a circular on July 11, 2022 stating that it has decided to put in place an additional arrangement for invoicing, payment and settlement of exports/imports in rupees. Before putting in place this mechanism, authorised dealer (AD) banks shall require prior approval from the RBI.

Indian banks are permitted to open Rupee Vostro Accounts under Regulation (7) of Foreign Exchange Management (Deposit) Regulations, 2016. The RBI said for settling trade transactions with any country, banks in India may open special Rupee Vostro Accounts of correspondent bank/s of the partner-country in trading.

“Indian importers undertaking imports through this mechanism shall make payment in rupees which shall be credited into the Special Vostro Account of the correspondent bank of the partner country against the invoices for the supply of goods or services from the overseas seller/supplier. Indian exporters undertaking exports of goods and services through this mechanism shall be paid the export proceeds in rupees from the balances in the designated Special Vostro Account of the correspondent bank of the partner country,” the RBI circular said.

This mechanism may enable Indian exporters to receive advance payment against exports from overseas importers in rupees.

As per the circular, the rupee surplus balance held can be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in special vostro accounts can be used for payments for projects and investments; export/import advance flow management; and investment in government bonds.
 
The exchange rate between the currencies of the two trading partner countries may be market-determined, the RBI added.

Federation of Indian Export Organisations (FIEO) welcomed the new provision to help exim trade with countries having forex shortages.

Hailing the new Provision, Dr A Sakthivel, president, FIEO said that in existing FEMA provisions, the final settlement has to be in free foreign exchange except for Nepal and Bhutan. Now the final settlement to all countries, if approved by RBI, can be in Indian Rupee.

“This move will pave the way for trading and settlement of Exim transactions in Indian Rupee. The timely move, at a time when many countries are facing huge forex shortages in Africa and South America, allowing only exim transactions through LC will help our exporters and importers,” added FIEO's chief.

“This move is a recognition of the Indian rupee as an international currency. We hope that the government will clarify on export benefits on such exports in Rupee, which is hitherto only granted for export payments received in foreign currency,” he stated. Financial Express