JULY 20229Issue of Bank Guarantee for trade transactions undertaken through this arrangement is permitted subject to FEMA Notification No. 8, amended from time to time, and the Master Direction on Guarantees & Co-acceptances provisions.The Rupee surplus balance may be used by mutual agreement for permissible capital and current account transactions.The balance in Special Vostro Accounts can be used for:Payments for projects and investments, Export/Import advance flow management, and investment in Government Treasury Bills, Government securities, etc., in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provisions.Cross-border transactions need to be reported in terms of the extant guidelines under FEMA 1999.AD bank maintaining the particular Vostro Account shall ensure that the correspondent blank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for counter measures. The bank of a partner country may talk to an AD bank in India to open a Special INR VOSTRO account. The AD bank will pursue approval from the Reserve Bank with details of the arrangement.What experts say about new mechanism?Experts praising the move said it would expedite trade between the two countries. Following the sanctions, payments to any Russian entity, including those not sanctioned, have taken longer than usual because of improved due diligence.Sakthivel, president of the Federation of Indian Export Organisations (FIEO), under the current provisions of the Foreign Exchange Management Act, final settlements must be in free foreign exchange except for Nepal and Bhutan. If RBI agrees, the final payment to all countries can be in the Indian rupee, Sakthivel stated."The Russian banks should have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited, relying on the transaction," told a senior private sector banker, counting that this will only be viable for Russian banks that are not part of the OFAC sanctions list.Implemented by the US Office of Foreign Assets Control (OFAC), the sanctions were enforced after Russia's invasion of neighboring Ukraine in February. Indian banks had long expected that the government and RBI would work out an alternative payment mechanism, as was done when Iran sanctions were levied in 2012 and again in 2018."It is a good move as far as India is worried. Since we import more than we export, we will save foreign currency under the new arrangement. For instance, under normal circumstances, we would have had to pay Russia in dollars for oil purchases, which can now be done through the rupee-rouble route," stated Madan Sabnavis, chief economist, Bank of Baroda.Industry experts said the pressure on India's forex reserves would diminish, a collateral benefit of the move to allow trade in rupees. In addition, the opening of this trade settlement route shows Russia's importance as India's trading partner in the face of increasing pressure from Western countries to cut links. That said, bankers believe this route will be restricted to Russia for the time being, and it is unlikely that other large trade partners would prefer settling transactions in rupees.Others saw it as an extension to RBI's announcements last week to enhance forex inflows and as a step to stabilize the rupee.Economists at Barclays said the measures are aimed primarily at reducing the demand for foreign exchange for settlement purposes of current account-related trade flows."The new steps allow Indian exporters and importers to use special Vostro accounts denominated in rupees to settle their rupee-denominated trade invoices. This step can be particularly useful for neighbouring countries, and those countries willing to use the rupee as a base currency for trade diversification in their settlement rules," Barclays' economists said in a note to clients.
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