Amendment of Foreign Trade Policy of India for Rupee Settlement

The Central Government has made changes to the Foreign Trade Policy of India to activate the RBI’s mechanism facilitating trade in the Indian Rupee.

Key facts

  • The recently amended Foreign Trade Policy of India allows international trade invoicing, payment and settlement in the Indian Rupee.
  • It enables Indian importers to make payments in rupees via the special Vostro accounts of the partner country bank against the invoices for the purchasing of goods or services from the overseas seller or supplier.
  • The new mechanism can be used by the banks after getting the approval from the Reserve Bank of India.
  • This gives effect to RBI’s mechanism that was unveiled in July to settle international trade in rupees to counter the depreciation of global currencies.
  • The RBI mechanism aims to promote trade with Russia, which also uses a similar mechanism to settle payments with Iran that is currently facing sanctions from the Western countries.
  • It is one of the major steps taken by India to achieve capital account convertibility.

What is a vostro account?

A Vostro account is an account held by a domestic bank on behalf of another foreign bank in the domestic bank’s currency. In Latin, the word “Vostro” means “Yours”. The bank holding the funds acts as a custodian for the account of a foreign counterpart.

About capital account convertibility

Capital Account Convertibility is a feature of a country’s financial regime that provides freedom to conduct investment transactions without any constraints. It removes all restrictions on the amount of domestic currency that can be converted into foreign currency to enable the acquiring of any foreign asset. India currently has a partially convertible capital account policy. A fully convertible capital account ensures increased stock market returns, reduction in transaction cost due to free rupee convertibility and a boost in savings and investments.

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