India and Malaysia can now make trade settlements in Indian Rupee

Trade between India and Malaysia can now be settled in Indian Rupee (INR) in addition to the current modes of settlement in other currencies, India's Ministry of External Affairs (MEA) announced on Saturday (April 1, 2023).

This follows a decision by the Reserve Bank of India in July 2022 to allow settlement of international trade in Indian Rupee (INR). This initiative by RBI is aimed at facilitating the growth of global trade and to support the interests of the global trading community in Indian Rupee (INR).

The India International Bank of Malaysia (IIBM), based in Kuala Lumpur, has operationalised this mechanism by opening a Special Rupee Vostro Account through its Corresponding Bank in India, Union Bank of India, the MEA said.

The move is significant, considering that Malaysia is the 13th largest trading partner for India while India stands amongst the 10 largest trading partners globally. According to official figures, Malaysia has emerged as the third largest trading partner for India from the ASEAN region and India is the largest trading partner for Malaysia among the countries of the Southeast Asian region.

India’s bilateral trade with Malaysia was worth USD 19.41 billion (bn) in 2021-2022. This included exports of USD 6.99 bn and imports of USD 12.42 bn, official data says.

On July 11, 2022, the RBI had put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in INR. According to the RBI, this was done "in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR".

The RBI move had come in the backdrop of the Ukraine crisis and the subsequent sanctions on Russia by several leading western powers for launching the invasion. The sanctions made it difficult to make payments for purchases from Russia in US Dollars, leading to the search for alternate payment mechanisms.

On March 14, 2023, the government had informed the Rajya Sabha that the RBI had granted approvals to foreign banks in 18 countries to open Vostro accounts to settle international trade in rupees.

According to information provided by the government, the RBI has granted approvals to domestic & foreign Authorised Dealer (AD) Banks in 60 cases for opening of Special Rupee Vostro Accounts (SRVAs) of banks from 18 nations. These are: Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, & UK.

RBI’s July 2022 circular had stated that Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.

Similarly, Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country, the RBI guidelines had said.