Banks from 22 countries have opened special Rupee vostro accounts in Indian banks in order to trade in local currency as part of incremental de-dollarisation plans.
Simply stated, vostro accounts allow domestic banks to offer international banking services to clients with global banking requirements. In a written response to the Lok Sabha, the Union Minister of State for External Affairs, Rajkumar Ranjan Singh, provided a list of the countries. Among them are Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, Bangladesh, Maldives, and the United Kingdom.
“Government is engaged with Indian trading community including the Small and Medium Enterprises (SMEs) to simplify the administrative procedures to implement this mechanism,” the minister said.
Last year, the Reserve Bank of India set in place an arrangement that permits transactions in domestic currencies to promote the expansion of global trade with an emphasis on Indian exports and to increase interest in the rupee.
Following the Reserve Bank of India's (RBI) announcement of a mechanism to settle payments for international commerce in rupees, particularly for India's exports, the internationalisation of the rupee gained momentum. The RBI authorised billing and payment in Indian Rupee for international trade on July 11, 2022.
Experts are of the opinion that if the mechanism is successful, it could go a long way towards internationalising the Indian rupee in the long term.
A currency is considered "international" if it is commonly accepted as a medium of exchange across the globe.
In December 2021, the RBI established an Inter-Departmental Group (IDG) to examine issues related to the internationalisation of the INR and suggest a path forward.
The panel has recently issued a report containing numerous short- and long-term recommendations.
In the short term, the Group members suggested enabling rupee as an additional settlement currency in existing multilateral mechanisms, integrating Indian payment systems with other countries for cross-border transactions, including G-Secs (or government bonds) in global bond indices, and providing exporters with equitable incentives for rupee trade settlement.
Long-term recommendations included a review of taxes on Masala bonds (rupee-denominated bonds issued outside India by Indian entities); international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions; examining taxation issues in financial markets to harmonise tax regimes of India and other financial centres; and allowing banking services in rupee outside India via off-shore Indian branches.
The IDG stated that the rupee has the potential to become an internationalised currency, citing India as one of the fastest-growing nations that has demonstrated remarkable resilience in the face of significant headwinds.