India’s rupee trade settlement mechanism

#GS-03 External Sector

For Prelims:

Currencies used for International Transactions:

The Most Popular Currencies for International Trading are;

The U.S. Dollar:

• The U.S. dollar, which is sometimes called the greenback, is the most traded currency on the planet. Which makes it first and foremost in the world of forex trading.
• The Dollar often acts as the intermediary in triangular currency transactions.
• Since it is held by nearly every central bank and institutional investment entity in the world USD acts as the unofficial global reserve currency.
• S. dollar also act as a benchmark or target rate for countries that choose to fix or peg their currencies to the dollar’s value.

The Euro:

• The euro is issued by the European Central Bank and is the second most traded currency behind the U.S. dollar.
• Euro is the official currency for most eurozone countries while also being the world’s second-largest reserve currency.
• Many nations within Europe and Africa peg their currencies to the euro to stabilize the exchange rate.

The Japanese Yen:

• Japanese yen is the most traded of Asian currencies.
• Yen is used to gauge the overall economic health of the Pan-Pacific region.

Pound Sterling:

• Pound Sterling also known as the Great British pound is the fourth most traded currency in the forex market.
• K. never adopted the euro as its official currency even when it was a member of the European Union.
• The British pound acts as a large reserve currency due to its historically high relative value compared to other global currencies.

Rupee trade settlement mechanism:

• India will open Vostro accounts of correspondent bank/s of the partner country for trading which will allow Indian importers to make payments in rupees.
• This rupee will be used to pay Indian exporters for the export proceeds from the partner country.

Vostro Account:

• Vostro Account is an account that a correspondent bank holds on behalf of another bank.

 

For Mains:

Advantages:

• It will lead to a growth of global trade and will provide support to the increasing interest of the global trading community in the Rupee.
• This scheme will allow India to have transactions with the countries under the economic sanctions of US such as Russia and Iran.
• This will reduce the risk of forex fluctuation and help save forex reserves.

Source “Rupee settlement options draw interest from 4 more nations“