The Reserve Bank of India unveiled a rupee settlement system for international trade, according to a notification on Monday.
Under this mechanism for international trade settlements in rupees, banks will need to seek prior approval to use, the RBI said in a release on Monday.
The order takes immediate effect and the mechanism is designed to "promote growth of global trade with emphasis on exports," the RBI said.
The notification said, 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 INR (Indian rupee), it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.
"Before putting in place this mechanism, AD banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office at Mumbai," added the RBI notification.
Under this new mechanism, exporters and importers can use a Special Vostro account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
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 Federation of Indian Export Organisations (FIEO) has welcomed the new provision to help exim trade with countries having forex shortage.
Welcoming 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 the 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.
The FIEO statement also read, "rhis move is a recognition of the Indian rupee as an international currency. We hope, observed Dr Sakthivel, that the government will clarify on exports benefits on such exports in rupee, which is hitherto only granted for exports payments received in foreign currency."
For the detailed RBI notification release, please read here.