On 11th July, India’s central bank (RBI) announced a major policy change in its international trade settlement framework. It announced that Indian banks will be able to settle international payments in Indian rupees rather than (mainly) US dollars. Earlier it seemed like a temporary phenomenon when the central bank allowed banks to trade with counterparts in Russia in rupees and Russian rubles. Turns out it was a deliberate move by the RBI, trying to strengthen the Indian rupee. The rupee has been depreciating a lot over the last couple of months. It is simply because foreign investors are not considering India as an attractive investment opportunity. So, the demand for the Indian rupee has been low which explains the depreciation. Adopting this policy can help increase demand for the Indian rupee and stop it from fluctuating further.
This is how international settlements work now. For example – if Greece is exporting rubber to India, they will send India their US bank account details. India will then send US dollars to that account. This is how most of the international payments are settled i.e. by banks in the US. What this scheme does is that it bypasses the whole settlement which is facilitated by US banks. For example – now Greece exporters will be able to set up their own accounts in India. So Indian importers will be able to settle the payment by just sending Indian rupees to this account. The Greece bank will then pay the exporter in euros according to the exchange rate. The Indian rupee in the account is used when Greece is importing something from India. However, the whole scheme only works if the trading partners of India import enough goods from India as well. It is the only way this scheme can work. It is to be noted that the banks still require approval from the Foreign Exchange department of RBI before settling the payments. Overall, the scheme is going to play a significant role in the long run. It is more about increasing the demand for the Indian rupee than anything else.