The Reserve Bank of India said on Monday that it was putting in place a mechanism to settle international transactions in rupee. In a notification, the central bank said that its aim was to “promote growth of global trade and to support increasing global interest in the rupee”.

The move will allow India to bypass orders that prevent using a global currency such as the US dollar for trade with certain countries, according to Moneycontrol. For example, India has been willing to trade with Russia but several countries have imposed sanction on its banks and restricted Moscow’s ability to carry out transactions in major currencies.

A rupee settlement mechanism will allow India to circumvent these sanctions and trade using the domestic currency.

In its notification, the RBI said banks would need to take its permission before setting up the rupee trade settlement mechanism. For enabling the mechanism, banks would need to create special rupee vostro accounts for the banks of the trading partner countries.

A vostro account allows a bank to hold money on behalf of another lenders.

Indian importers using this mechanism will be paying in rupees that will be credited into the vostro account of the bank of the trading partner country against the invoices for the supply of goods or services.

For Indian exporters, they will be paid in rupees from the balance in the designated special vostro account. Indian exporters can also be paid in advance in rupees under this mechanism.

However, the RBI added: “Before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline.”

In case, a bank of a trade partner country approaches a Indian lender to open a special rupee vostro account, it must seek RBI’s approval.

The Federation of Indian Export Organisations welcomed the provisions.

“This move will pave the way for trading and settlement of Exim [export import] transactions in Indian rupee,’ said the body’s chief A Sakthivel. “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,”

Rupee drops to a new low

Meanwhile, the rupee dropped by 19 paise to close at its new low of 79.45 against the US dollar on Monday, reported PTI. The fall was due to high demand for dollar and outflow of foreign funds, analysts said.

At the forex market, the rupee opened at 79.30 against the dollar on Monday. It witnessed an intra-day high of 79.24 and a low of 79.50 before settling at 79.45. The currency has now depreciated for three successive trading sessions.

Sugandha Sachdeva, vice president of Commodity and Currency Research at Religare Broking, told PTI that the value of dollar was rising as the US added more jobs in June, increasing the risk of rate hike.

“The greenback has surged towards a new 20-year high as the concerns about higher terminal rates in the US and deteriorating growth prospects are leading to safe-haven flows in the dollar, which is likely to weigh on the domestic currency in the near term,” Sachdeva said.