RBI’S STEPS TO BOOST CROSS-BORDER TRANSACTIONS IN RUPEE

PRELIMS BITS: 

The Reserve Bank of India (RBI) has undertaken a review of existing regulations under the Foreign Exchange Management Act (FEMA), 1999, to promote cross-border transactions in the Indian Rupee (INR), aiming at the internationalization of the rupee.

Recent Changes in FEMA Regulations by RBI

1. Overseas INR Accounts
   • People residing outside India can now open INR accounts in overseas branches of Authorized Dealer banks. These accounts can be used for settling permissible current and capital account transactions with residents of India.
2. Settling Transactions with Non-Residents
   • Residents outside India can use their repatriable INR accounts, such as SNRR (Special Non-Resident Rupee Account) and SVRAs (Special Vostro Rupee Accounts), to settle transactions with other non-residents.
3. Foreign Investment Using INR Balances
   • Balances in repatriable INR accounts can now be used for foreign investment purposes.
4. Indian Exporters’ Accounts
   • Indian exporters can open foreign currency accounts abroad to settle trade transactions, including receiving export proceeds and using these proceeds for import payments.

Internationalization of the Rupee

Internationalization is the process of increasing the use of the INR in cross-border transactions, involving:

1. Promoting INR for Import and Export
2. Incorporating INR in Current Account Transactions
3. Use of INR in Capital Account Transactions

Benefits of Internationalization of Rupee

• Financial Independence: Greater protection from external shocks.
• Efficient Cross-Border Trade: Facilitates smoother international transactions.
• Reduced Dollar Demand: Strengthens the INR and reduces reliance on the US dollar.
• Lower Foreign Reserves Requirement: Helps reduce the need for foreign reserves to manage external shocks.

Special Vostro Rupee Accounts (SVRAs)

• SVRA: Accounts held by domestic banks for foreign banks in INR, enabling cross-border payments in rupees.
• Example: When an Indian importer makes a payment to a foreign trader in rupees, the amount is credited to the SVRA and vice versa.

Special Non-Resident Rupee Accounts (SNRR)

• SNRR: A current account held by non-resident individuals or entities with business interests in India.
• These accounts can be used for specified transactions related to trade and foreign investments.

These steps aim to enhance the use of the rupee in global transactions, strengthen India’s financial position, and reduce dependence on foreign currencies.