India Eases Rupee Trade Rules, but Wider Adoption Will Need More Work

The government has made it easier for Indian exporters to invoice overseas sales and receive payments in rupees.  For countries outside the Asian Clearing Union, export contracts and invoices may now be denominated in any foreign currency or rupees. Export payments may also be received in either. Earlier, export earnings generally had to be received in a freely convertible currency.

Eligible rupee payments for exports to any country other than Nepal and Bhutan will now qualify for FTP benefits and count towards fulfilment of export obligations.

Rupee earnings received through approved banking channels will therefore be treated at par with export payments received in foreign currency.

Exports financed through EXIM Bank or Government of India lines of credit may also be invoiced in Indian rupees.

ACU countries

The ACU is a regional payment arrangement established in 1974 to facilitate trade settlements and reduce repeated transfers of foreign exchange by periodically settling the net obligations of its members.

It has nine members—Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka—represented by their central banks or monetary authorities.

For exports to Bangladesh, Iran, Maldives, Myanmar, Pakistan and Sri Lanka, contracts must use a currency determined by the ACU. However, invoicing and settlement may also follow directions issued by the Reserve Bank of India.

Nepal and Bhutan are treated separately. Export contracts with these two countries must generally be denominated and settled in Indian rupees or according to RBI directions.

Iran is covered by the ACU rules, but trade in sensitive goods and technologies must continue to comply with paragraph 2.19 of the FTP. This provision covers specified items linked to nuclear activities and nuclear-weapon delivery systems and reflects India’s obligations under UN Security Council Resolution 2231 and relevant International Atomic Energy Agency rules.

Why Now

The amendment aligns the Foreign Trade Policy with RBI’s Foreign Exchange Management regulations issued in 2023, which already allow wider use of the rupee in international payments.

Earlier, exporters receiving rupee payments through an RBI-approved banking channel were not always certain whether such receipts would qualify for FTP benefits or count towards their export obligations. The new rules remove this uncertainty by placing eligible rupee receipts on par with foreign-currency earnings.

Rupee settlement may reduce currency-conversion costs and exchange-rate risks for Indian exporters. It could be particularly useful in trade with countries facing dollar shortages or difficulty accessing established international payment systems.

The change may also support wider international use of the rupee by giving Indian exporters and overseas buyers an alternative to settling every transaction in US dollars or another freely convertible currency.

More Needed

GTRI cautions that the notification removes an important regulatory barrier but does not resolve the commercial difficulties surrounding rupee trade.

Foreign buyers struggle to obtain rupees, while overseas banks may hesitate to hold large rupee balances because the currency is not fully convertible. Trade imbalances may leave some partner countries with unused rupees. Exchange-rate risks, expensive hedging, complex banking procedures and the continued global preference for the US dollar may further limit acceptance of rupee settlement.

India may negotiate practical rupee-settlement agreements with key trading partners and allow wider uses for accumulated rupee balances. Foreign entities need simple options to use, invest, convert or repatriate these funds.

The RBI and DGFT may introduce standard banking procedures covering documentation, KYC requirements, reporting and settlement timelines. Affordable currency hedging, rupee-denominated export credit and ECGC protection may also be provided on terms comparable to those available for foreign-currency transactions.

India may initially prioritise countries facing foreign-exchange shortages, importing significant quantities from India or already earning substantial rupee balances through exports to the Indian market.

These measures can make rupee settlement a practical trading option.