Banks Exhibit Keen Interest in Rupee-Based Trade Settlement as India Expects Big Jump in Exports

India has amended its foreign trade policy to allow international trade to be settled in the national currency. The trade settlement in Indian rupees is, among others things, designed to avert the effects of Western sanctions slapped on Russia, Iran, and several Latin American states - with which Delhi maintains a substantial amount of trade.

At least half a dozen Indian banks, including the country's largest lender -- the State Bank of India -- have shown an interest in settling trade in the national currency, people familiar with the matter told Sputnik.

The other banks named are IndusInd Bank, Canara Bank, Yes Bank, and UCO Bank, among others.

Sources told Sputnik that these banks are eager to take part in the rupee-based trade mechanism as it would provide them with the opportunity to boost their presence in new regions.

The finance ministry has recommended a list of Russian banks to the Reserve Bank of India (RBI) for consideration them as partners in Rupee-Ruble transactions, sources added, including Novikombank, Bank Rossiya, Bank Otkritie, PSCB, and VEB.

India's central bank, the Reserve Bank of India, has cleared the name of Sberbank and JSC VTB — the largest and second-largest bank in Russia — for trade settlement in national currencies.

Intending to facilitate trade settlement in national currencies, India’s UCO Bank has partnered with Gazprom Bank, while Yes Bank also formed an arrangement with Russia’s Petersburg Social Commercial Bank (PSCB) last month.

State-run UCO Bank received the RBI’s approval to open a special Vostro account with Gazprombank of Russia.

Sources added that VEB, VTB, and Sberbank will also announce agreements with their Indian partners very soon.

Following media reports that major Indian banks are allegedly reluctant to opt for the rupee payment option, fearing Western sanctions, an official observed that lenders do not face risks in partnering with banks of those countries with which India has a negative trade balance.

“Russian oil, chemicals, and fertilizers are crucial for India. The trade balance is inclined in favor of Russia. In this scenario, Indian banks, larger or small, are unlikely to face trouble,” the official noted.

Meanwhile, Nikolay A. Alekseev, Deputy Chairman of the Management Board, International Business Development & E-Commerce, of Petersburg Social Commercial Bank, told Sputnik that his bank has a “great interest” in doing business with India and cross-border remittances business in Indian Rupees.

PSCB opened its first correspondent account in Indian Rupees over five years ago with the Branch of Sberbank of Russia in India. It also plans to provide trade settlements for Indian businesses from other parts of the world.

“This year 2022 we’ve opened a new Correspondent Account in INR with the Bank in India,” a PSCB official told Sputnik.

“The new correspondent account would enable our bank to increase the volume of payments of the existing customers made via PSCB JSC Bank and to on-board new clients offering them better terms & conditions,” Alekseev added.

Indian exporters estimate the use of rupees could boost India's exports to Russia to about $5 billion by March 2023, nearly double the figure from the last financial year.

“We are also looking up additional exports in Russia through Rupee Payment Mechanism and have requested the Commerce Minister to look into extending this mechanism for exports to countries having acute forex shortage,” A. Sakthivel, President of the Federation of Indian Export Organisations (FIEO), said.

“Small banks with no foreign presence can help settle the bilateral transaction and bypass western sanctions. The strategic step is less risky because the impact of sanctions on these banks would be limited; in the worst case, the effect of their failure on the economy will be insignificant,” economist Sudhanshu Kumar told Sputnik.

On September 30, T. Rabi Sankar, a deputy governor at the RBI, said that India had received responses from four to five countries for its mechanism for international trade settlement in rupees while other nations have also expressed interest.

“The response has been fairly good. But since the process involves a lot of vetting at the level of banks, at the level of the central bank, at the level of the government, the initial process is taking some time,” Sankar said at a post-policy interaction.

In July, India announced the new framework, which it said aimed to promote the growth of global trade, and support rising global interest in the rupee.