The Reserve Bank of India (RBI) will also establish a reference rate between rupee and other currencies, starting with the Indonesian rupiah and the United Arab Emirates (UAE) dirham.
Governor Sanjay Malhotra proposed to permit authorised dealer banks to lend in INR to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade transactions, and to establish transparent reference rates for currencies of India’s major trading partners.
Another proposed measure is to permit wider use of special rupee vostro account (SRVA) balances by making them eligible for investment in corporate bonds and commercial papers.
Currently, most countries quote rates using the US dollar as an intermediary, while trade financing is also done largely in US dollars. These proposed steps would allow Indian banks to give loans in INR to importers/exporters in nearby countries and create a reference rate directly between INR and other currencies.
However, the process of benchmarking the currency pair needs to be worked out as there is no active INR-dirham, or INR-rupiah market with enough transactions to naturally discover a reliable exchange rate.”We are currently looking at a couple of currencies-Indonesian rupiah, Dirham and some more which we will gradually take up,” deputy governor T Rabi Sankar said during the media interaction after the policy announcement. “We will have to see how to set the benchmark because there are not many active transactions to begin with, so the process needs to be worked out by FBIL on how to initiate something. This is a case where the pricing reference rate has to show first and the market has to pick up from there.”FBIL (Financial Benchmarks India) is the body that sets reference rates, like the official RBI USD/INR reference rate.
In a liquid market, the market sets prices through active trades, and benchmark agencies report them. But since the market is illiquid, the FBIL will need to publish a reference rate first.
as a Reliable and Trusted News Source