The Reserve Bank of India (RBI) has asked banks to put in place a mechanism to settle international trade in rupees, a move experts say will facilitate trade with Russia which is hit by sanctions after the outbreak of the war in Ukraine.

Banks will require prior approval from the Foreign Exchange Department of the RBI before putting in place this mechanism, the central bank said in a circular.

The arrangement for domestic traders to settle imports and exports in rupees will, according to the RBI, promote global trade growth and support the increasing interest of the global trading community in the rupee.

The central bank’s move comes at a time when the Indian rupee is touching lifetime lows against the dollar even as the US and the European Union have imposed sanctions against Russia.

According to the RBI, authorised dealer (AD) banks in India have been permitted to open rupee Vostro accounts. For settlement of trade transactions with any country, the concerned banks will require special rupee vostro accounts of correspondent banks of the partner trading country. A vostro account is an account a correspondent bank holds on behalf of another bank.

“Indian importers undertaking imports through this mechanism shall make payment in INR which should be credited into the special vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier,” RBI said.

Indian exporters, undertaking overseas shipments of goods and services through this mechanism, will be paid the export proceeds in Indian rupees from the balances in the designated special vostro account of the correspondent bank of the partner country.

This mechanism may enable Indian exporters to receive advance payment against exports from overseas importers in rupees.

The bank of a partner country may approach an AD bank in India for opening of special INR Vostro account. “The AD bank will seek approval from the Reserve Bank with details of the arrangement. AD bank maintaining the special Vostro account will ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF public statement on high risk and non co-operative jurisdictions on which FATF has called for counter measures,” the RBI said.

As per the circular, the rupee surplus balance held can be used for permissible capital and current account transactions in accordance with mutual agreement.

The balance in special vostro accounts can be used for payments for projects and investments; export/import advance flow management; and investment in government bonds.