Current Affairs – 13th July 2022


  • News: The Reserve Bank of India (RBI) on Monday introduced a rupee settlement system for international trade, which could help India promote its exports and facilitate trade with countries under sanction.
  • Details:
    • Banks will need RBI approval to use the new system. The Foreign Exchange Management Act (FEMA) states that the final settlement of exports, except for Nepal and Bhutan, can only happen in freely convertible currencies such as the US dollar, euro, yen, and the British pound.
    • Now, the invoicing, payment, and settlement of exports and imports to all countries, if approved by the RBI, can be in the Indian rupee.
    • Under this 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.
    • The mechanism is meant to facilitate trade with countries under sanction. Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway. RBI’s move would ease the situation. Also, several countries including Sri Lanka and some in Africa and Latin America are facing forex  shortage. As such, the new mechanism will help India promote its exports. It will also  help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude. It will also help stabilize rupee.
    • Benefits to exporters in the form of duty drawbacks, export promotion capital goods incentives, and rebate on duties and taxes under different government schemes are available only if the payments or export realizations come in freely convertible currencies such as the US dollar. Therefore, exporters are seeking clarification from the government whether such exports in rupee will also be eligible for benefits. The director general of foreign trade may come up with a clarification on the issue.
  • About Vostro Account:
    • A vostro account is an account a correspondent bank holds on behalf of another bank.
    • These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart.
    • For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer’s behalf, the account is deemed by the holding bank as a vostro account of the insurance company.
  • About Foreign Exchange Management Act:
    • The Foreign Exchange Management Act, 1999 (FEMA), is an Act of the Parliament of India “to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”.
    • It was passed on 29 December 1999 in parliament, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India, replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India.
    • It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organization (WTO).
    • It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect from 1 July 2005.
  • Main features:
    • Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.
    • Free transactions on current account subject to reasonable restrictions that may be imposed.
    • Without general or specific permission of FEMA, MA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorized person.
    • Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest generally.
    • Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.
    • Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.
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