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Power of Indian Rupee: World New Trading Currency

The Reserve Bank of India (RBI) has announced the establishment of a system for foreign trade settlements in rupees. The order is effective immediately, and the mechanism is intended to “encourage global trade growth with a focus on exports,” according to the RBI.

“It has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR,” the RBI said in a statement on Monday.

The RBI’s order comes as the rupee has fallen to record lows versus the US currency in recent weeks.

Last Monday, the State Bank of India (SBI) urged that RBI should make a “conscious effort to internationalize the rupee”. According to the SBI’s “Research Eco wrap,” “the Russia-Ukraine crisis and the payment difficulties created by it are a good chance to insist on export settlement in rupees, commencing with some of the smaller export partners.”

The Reserve Bank of India (RBI) launched the system in July. Countries such as Russia already have such a system in place as a result of sanctions imposed on the country after it conducted a war against Ukraine.

According to a government official aware of the move, the Indian government is looking into methods to bring countries that are particularly short of dollars into the ambit of the mechanism.

In addition, four countries have expressed interest in launching an unique rupee account known as a ‘Vostro account.’ The documents, however, revealed that partner banks in India have yet to give facilities or means to open such accounts. If a country wishes to open a Vostro account, the RBI must provide permission.

The RBI has approved the establishment of special Vostro accounts in Mauritius and Sri Lanka, both of which expressed interest in such accounts.

The document also discloses that the Indian government has given banks permission to open 12 Vostro accounts for rupee trade with Russia. Six more accounts have been authorized, five for commerce with Sri Lanka and one for trade with Mauritius.

Power of Indian Rupee: World New Trading Currency

India’s purchasing power parity was 23.1 LCU for every international dollar in 2021. India’s purchasing power parity climbed from 10 LCU to 1 USD in 2002 to 23.1 LCU to 1 USD in 2021, expanding at an average yearly rate of 4.55%.

The number of units of a currency that must be converted into U.S. dollars in order to purchase the equivalent amount of goods and services on the domestic market is known as the purchasing power parity conversion factor. For GDP, this conversion factor is used.

What is the Indian rupee exchange rate?

On July 11, the RBI announced the establishment of a system to facilitate overseas trade in Indian rupees.

With immediate effect, the Reserve Bank of India (RBI) has established a system to ease cross-border commerce in rupees (INR). However, in order to facilitate these transactions, banks operating as authorised dealers must first obtain regulator approval.

The RBI stated in a notification that it had been decided to implement an additional arrangement for exports and imports to be invoiced, paid for, and settled in INR in order to support the expansion of global trade with a focus on exports from India and to support the growing interest of the global trading community in INR.

Banks must obtain prior authorisation from the Foreign Exchange Department of the Reserve Bank of India, Central Office in Mumbai, before using this method, it stated.

Mahesh Desai, chairman of EEPC India, stated that the RBI’s decision to establish an INR-based International Trade Settlement Mechanism would make it easier to conduct business with sanctioned nations like Iran and Russia. “Due to payment issues, trade with Russia has essentially come to a complete halt ever since sanctions were put in place. We observe an improvement in the payment problems with Russia as a result of the trade facilitation system the RBI created.

The action would also lessen the danger of currency fluctuations, especially when considering the parity between the Euro and the Rupee. This is our first step toward complete convertibility.

The approach allows all exports and imports to be labelled and billed in Indian rupee, while the market settles the exchange rate between trading partners.