Cross-Border Payments

Context:
The Reserve Bank of India (RBI) and the Maldives Monetary Authority (MMA) have signed an agreement aimed at promoting the use of local currencies—the Indian Rupee (INR) and the Maldivian Rufiyaa (MVR)—in cross-border transactions.

About Cross-Border Payments (CBPs)

Cross-border payments involve financial transactions where the payer and the recipient belong to different countries. These payments are crucial for international trade, investment, and personal remittances.

Types of Cross-Border Payments

1. Wholesale Cross-Border Payments:
   • Transactions occur between financial institutions.
   • Used for activities like foreign exchange trading, large-scale imports and exports, and intergovernmental transfers.
   • Primarily employed by governments, large corporations, and financial markets.
2. Retail Cross-Border Payments:
   • Include individual and business-level transactions, such as:
     • Person-to-Person (P2P): Migrants sending remittances to their families.
     • Person-to-Business (P2B): Cross-border online shopping or bill payments.
     • Business-to-Business (B2B): Payments for goods and services between companies.
   • Remittances play a significant role in this category.

Market Trends in Cross-Border Payments

• The global CBP market was valued at USD 181.9 trillion in 2022 and is projected to grow to USD 356.5 trillion by 2032, reflecting a compound annual growth rate (CAGR) of 7.3%.

Cross-Border Payments in India

• India manages significant cross-border flows:
  • Inbound Remittances: Approximately USD 80 billion.
  • Outbound Remittances: Around USD 19 billion.

Evolution of Cross-Border Payment Systems in India

1. Pre-Technology Era:
   • Non-resident Indians (NRIs) relied on demand drafts, often sent via courier services, for remittance.
2. IMPS Integration:
   • The launch of the Immediate Payment Service (IMPS) enabled near-instant credit, completed in under 3 minutes.
3. Online Remittances:
   • The National Electronic Fund Transfer (NEFT) system introduced secure and direct payment mechanisms.
   • NEFT is operated centrally by the RBI.
4. UPI Integration for Foreign Inward Remittance:
   • The inclusion of the Unified Payments Interface (UPI) further simplified and accelerated foreign inward remittances.

RBI Initiatives in Cross-Border Payments

• The Payment Aggregators of Cross-Border Transactions (PA-CB Regulation):
  • Established to regulate all cross-border transactions, including those for imports and exports.
  • Replaces earlier guidelines and ensures all involved entities come under RBI’s regulatory oversight.

Benefits of Local Currency Agreements like INR-MVR Framework

1. Reduced Dependence on Third-Party Currencies:
   • Minimizes reliance on globally dominant currencies like the US Dollar.
2. Lower Transaction Costs:
   • Direct currency usage avoids conversion fees, reducing the cost of transactions.
3. Enhanced Trade and Investment:
   • Facilitates smoother and more affordable trade between partner countries.
4. Economic Stability:
   • Boosts demand for local currencies and stabilizes exchange rates.

[BOX] Evaluate the significance of the INR-MVR framework signed by the RBI and Maldives Monetary Authority for cross-border payments. Discuss its potential benefits, challenges, and the impact on trade and economic relations between the two countries.

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