On 11th July 2022, the Reserve Bank of India has issued a three-page notification to make an announcement regarding the arrangement done for the acceptance of Indian rupees in all international trade settlements going forwards. Earlier most of the transactions were made through USD only as USA is considered to be a comparatively more powerful and stable economy among all countries globally. Allowing INR as a settlement currency for international trades by RBI simply indicates that the rupee can replace US Dollar in the international trade mechanism. This will surely grow the value of INR at the international level.
Earlier international trades settlements were mostly done in USD which made the Dollar dominate the international trade and market. This feature of INR enables Indian trades to perform import or export business in Rupees. Trading countries need not notify about each and every international transaction as they used to do earlier when USD was the only currency to transact. This will definitely strengthen INR in the long term as dependency on USD will be decreased when traders can make settlements in INR only.
India can easily transact with Russia for crude oil without intervention if US and USD. Due to the recent Russia-Ukraine war the USA has banned all trade with Russia. In this situation, if India transacts with Russia and settles their trades in USD this will automatically be informed to the USA as the high-value international transaction would only be performed through an online payment medium which will be done through a USD Vostro account in USA.
In simple words, Vostro are bank’s bank account with another bank in another country where traders’ bank is not operating directly. These banks use to have collaborations with other banks in different nations and settle their transaction through these Vostro accounts. For any International trade settlement in INR, foreigners have to open a special rupees Vistro account with RBI. This is a way forward to the growth and strengthening of the Indian currency in the international market through its global acceptability and recognition as an international trade settlement currency. This will also enable foreign countries to earn interest by investing in Indian government bonds.
This is also a tight slap for the airs which declared INR as the weakest currency in the world as it decreases its value in terms of USD. However, internationalisation of INR will obsolete the dependency and Intervention of USD in international market for Indian traders. This will strengthen the INR and also create it’s own position among the traders globally. The arrangement of allowing INR as settlement currency for international trades decrease the demand of USD as trading contraries can do payments via INR. Loss of demand will gradually impact the value of USD which is near around Rs. 80 per 1 Dollar.