Rupee-rouble rule: What RBI move means for Russia trade

A host of measures have been taken by govt and RBI in recent days to ease rupee-rouble trade. TOI takes a look at the steps:

Why is there a buzz around rupee-rouble trade again?

Days after Trump announced higher tariffs for India, RBI on Aug 5 issued a circular allowing authorised dealer (AD) category-1 banks to open special rupee vostro accounts (SRVAs) for their foreign correspondent banks without prior RBI approval. On Tuesday, RBI made it easier for these funds to be freely invested in govt securities and treasury bills, lifting some of the restrictions.

What is a vostro a/c?

A vostro account is a bank account where the domestic bank acts as a custodian or correspondent for the foreign bank's funds in local currency. An Indian bank maintaining an account in Indian rupees for a Russian bank is called a vostro account. An SRVA facilitates oil trade with Russia by enabling transactions to be settled directly in rupees without converting through third-party currencies like the dollar, which is the case with other vostro accounts.

How will RBI move help?

The change simplifies and accelerates the process of opening these accounts, which are used to facilitate invoicing, payment, and settlement of international trade transactions in Indian rupees. Previously, banks had to seek RBI permission before opening SRVAs, but now they can open them independently, speeding up rupee-based trade settlements.

How does the SRVA facilitate trade with Russia?

In the context of oil trade, Russian oil exporters, through their banks, can hold Indian rupees in their SRVA maintained with an Indian bank, allowing payments for oil shipments from Indian importers to be made efficiently and quickly in rupees. This bypasses the need for dollar-based trade settlements, reducing currency conversion costs, exchange rate risks, and payment delays.

What are the challenges?

India imports more from Russia than it exports, and the oil-import-driven trade deficit causes Russia to accumulate Indian rupees, complicating settlements. Russian exporters, who do not face US sanctions, prefer payments in dollars to rupees.

The volatile, tightly controlled rouble complicates direct exchange with the rupee, often necessitating costly conversions through the dollar. Western sanctions, including restrictions on Russian banks' access to SWIFT, create operational hurdles and make Indian banks cautious when clearing payments.

How are these challenges being addressed?

Measures include developing a dynamic rupee-rouble exchange rate mechanism to bypass costly dollar conversions, establishing payment confirmation systems, and exploring alternative financial messaging networks to replace SWIFT. RBI has allowed Russian entities to invest surplus rupee balances from SRVAs in Indian G-Secs, bonds, equity, and infrastructure projects, enabling use of the funds beyond simple trade settlements. Proposals also include permitting rupee balances to be used for exports to third countries, allowing Russian suppliers to order goods from India using those rupees while receiving payment from other nations in different currencies. Discussions are underway on implementing trilateral settlement mechanisms involving the UAE.