India removes hurdle to rupee trade in bid to expand local currency use

India has removed a regulatory hurdle that had made it harder for exporters to settle overseas sales in Indian rupees, in a move aimed at expanding the use of the local currency in global trade.

The Directorate General of Foreign Trade (DGFT) on Thursday amended the Foreign Trade Policy 2023 with immediate effect, bringing rules for rupee export receipts in line with the Reserve Bank of India’s foreign-exchange regulations.

The change allows export contracts, invoices and payments with countries outside the Asian Clearing Union (ACU) to be denominated and settled either in Indian rupees or foreign currencies.

The move could make it easier for Indian exporters to use the rupee in trade with countries that face shortages of dollars and other major foreign currencies.

But the wider use of the rupee will depend on whether overseas buyers can obtain the currency easily and whether banks outside India are willing to hold and transact in it.

What has changed?

The DGFT amended two provisions of the Foreign Trade Policy to align rules on the denomination of export contracts and eligibility for trade-policy benefits when export proceeds are received in Indian rupees.

Earlier, export proceeds generally had to be realised in a freely convertible foreign currency, even though exporters could, in some cases, invoice overseas buyers in rupees.

Under the revised rules, eligible export receipts received in rupees can qualify for benefits under the Foreign Trade Policy and can also count towards exporters’ obligations, provided the transactions are routed through authorised banking channels.

The rules apply to exports to all countries, although the arrangements differ depending on the destination.

Rupee receipts from exports to Nepal and Bhutan are excluded from the new provision and continue to be governed by separate arrangements.

Why does the move matter?

India has been trying to increase the use of the rupee in international trade and reduce the dependence of its exporters and importers on foreign currencies, particularly the US dollar.

The latest change removes a disconnect between the Foreign Trade Policy and the RBI’s foreign-exchange rules.

The RBI had already allowed greater use of the rupee for cross-border transactions under its 2023 Foreign Exchange Management regulations.

Thursday’s notification effectively brings trade-policy rules in line with that framework, giving exporters greater certainty when they choose to settle transactions in rupees.

The move could also support trade with countries that have limited access to dollars or other freely convertible currencies.

For Indian exporters, the ability to receive payment in rupees can reduce some foreign-exchange exposure in transactions where buyers are willing to use the Indian currency.

Rupee trade still faces major challenges

The regulatory change is an important step, but it is unlikely to be enough on its own to turn the rupee into a widely used international trade currency.

Ajay Srivastava, founder of the Global Trade Research Initiative, said the notification removes a major regulatory ambiguity but would not by itself lead to large-scale rupee trade.

“Regulatory permission alone will not create large-scale rupee trade,” Srivastava said.

One of the biggest obstacles is the ability of foreign buyers to obtain rupees and use them for payments.

Overseas banks may also be reluctant to hold substantial rupee balances because the currency is not fully convertible.

Srivastava said India would need country-specific settlement arrangements, simpler banking procedures and affordable hedging mechanisms to make rupee transactions more attractive.

He also said wider use of the rupee would require rupee-based export credit and export-credit insurance.

What are the rules for ACU countries?

The latest changes do not apply in the same way to members of the Asian Clearing Union.

The ACU is a regional payment arrangement that allows participating countries to settle their net trade obligations periodically, reducing the need for repeated foreign-exchange transfers.

Its members are Bangladesh, Iran, Maldives, Myanmar, Pakistan and Sri Lanka.

For these countries, export contracts generally need to be denominated in a currency determined under the ACU framework, although the RBI’s directions may also apply.

Nepal and Bhutan have separate arrangements.

What does it mean for exporters?

The immediate impact of the DGFT change is greater flexibility for Indian exporters.

Companies can now receive eligible export payments in rupees without losing access to relevant trade-policy benefits, provided the payments are routed through approved banking channels.

This could be particularly useful for exporters dealing with markets where access to dollars is constrained or where buyers are willing to use the rupee for settlement.

However, the success of the policy will ultimately depend on demand for the rupee outside India.

Foreign companies must be able to obtain the currency at reasonable cost, while banks must be willing to facilitate rupee transactions and hold rupee balances.

The government’s latest step therefore removes an important regulatory barrier, but turning the rupee into a more widely accepted currency for global trade will require deeper banking, financial and bilateral settlement arrangements.

For India, the move marks another step towards making the rupee a more prominent part of the country’s international trade architecture.