The Rupee Payment Mechanism is a framework, officially known as the International Trade Settlement in Indian Rupees (INR), introduced by the Reserve Bank of India (RBI) to facilitate cross-border trade transactions in the domestic currency. This mechanism is a concept and an additional arrangement for invoicing, payment, and settlement of exports and imports, co-existing with the traditional settlement in freely convertible foreign exchange.
The mechanism was created by the RBI via A.P. (DIR Series) Circular No. 10 on July 11, 2022, to promote the growth of global trade, emphasize exports from India, and support the increasing global interest in the INR. It was partly a solution to the problem of trade settlement difficulties with countries facing sanctions, such as Russia, by bypassing the reliance on major currencies like the US Dollar.
The core of the mechanism is the Special Rupee Vostro Account (SRVA), which is an INR-denominated account that a foreign bank holds with an Authorized Dealer (AD) Category-I bank in India. For the mechanism to work, the trade contract must be denominated and invoiced in INR. An Indian importer pays in INR, which is credited to the partner country's SRVA. Conversely, an Indian exporter receives payment in INR from the balance in the designated SRVA. The exchange rate between the two currencies is market-determined.
This mechanism connects directly to the Foreign Exchange Management Act (FEMA), 1999, under which the INR is not a freely convertible currency. It also connects to the Directorate General of Foreign Trade (DGFT), which amended the Foreign Trade Policy (FTP) to allow for INR settlement. The DGFT introduced Para 2.52(d) via Notification No. 33/2015-20 on September 16, 2022, to permit invoicing and settlement in INR. A significant recent change was the amendment of Para 2.53 of the FTP via Notification 43/2015-20 on November 9, 2022, which extended export benefits and the fulfillment of Export Obligation norms to export realisations made in INR. Furthermore, the RBI has eased the process for opening SRVAs, allowing AD Category-I banks to open them without prior RBI approval for correspondent banks they already have a relationship with.