Policy measures welcome, but regulatory approvals alone may not result in large-scale export transactions in Indian currency: GTRI

The Central government’s decision to ease the rule governing rupee based foreign trade transactions is a welcome step but regulatory approvals alone will not result in large-scale export and import trade in Indian currency, says Delhi based think-tank Global Trade Research Initiative (GTRI).

In its response to the Directorate General of Foreign Trade (DGFT) notification that made amendments to the relevant portions of the Foreign Trade Policy (FTP) to make this change effective from August 20, GTRI said the move removes uncertainty and places eligible rupee export receipts on par with foreign-currency earnings. But regulatory permission alone will not create large-scale rupee trade unless foreign buyers are able to obtain rupees easily, and overseas banks have practical options to use, invest, convert or repatriate their balances, it said.

“India now needs country-specific settlement arrangements, simpler banking procedures, affordable hedging, rupee-based export credit and ECGC protection. Without this supporting system, rupee invoicing may remain a useful facility rather than becoming a widely used trade option,” Ajay Srivastava, founder, GTRI said.

The notification amends the FTP and covers exports to all countries, although the rules vary by destination.

The amendment aligns the FTP 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.

According to GTRI, 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.

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”, the think-tank said.

GTRI also suggests measures can make rupee settlement a practical trading option. “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”, Srivastava says.

He suggests that 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, he adds.

The think-tank also says India should initially prioritise rupee trade between countries facing foreign-exchange shortages, importing significant quantities from India or already earning substantial rupee balances through exports to the Indian market.