Sri Lanka and Russia will be the first countries to use the Indian rupee trade settlement mechanism, an initiative that allows using Indian rupees instead of dollars and other major currencies for conducting International transactions.

India’s Central Bank has approved banks to open 5 special rupee trading accounts, called Vostro accounts, for trade with Sri Lanka through the Indian rupee trade settlement mechanism, Khaleej Times reported.

The report further states that the Reserve Bank of India has given approval to banks to open 12 Vostro accounts for trade in rupees with Russia. Another account for trade with Mauritius has also been authorized by the RBI, which set up the mechanism in July.

Following the opening of Vostro accounts, Sri Lankan citizens can now hold $10,000 (Rs 8,26,823) in physical form. This also means that Sri Lankans and Indians can use Indian rupees instead of US dollars for international transactions with each other.

The Indian government since July this year, has been looking to bring countries that are short of dollars, into its rupee settlement mechanism.

According to the Federation of Indian Export Organisations (FIEO) director general Ajay Sahai, “a number of issues have been sorted out. Exporters and importers have begun approaching banks for opening of the accounts."

“So, trade settlement with Russia under the new payment system is expected to commence soon for some shipments," Sahai added.

This development comes as the trade gap between Russia and India was appearing to widen. While Russia has swiftly become India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the absence of an efficient payment mechanism.

It is also pertinent to mention that India's rupee trade settlement mechanism is also attracting interest from other countries including Tajikistan, Cuba, Luxembourg and Sudan.

Image courtesy: Times of India