When engaging in exports, it is crucial to determine the currency in which you wish to receive payment.
According to the Foreign Trade Policy of 2023, all export contracts and invoices must be denominated in either a freely convertible currency or Indian rupees. However, Export Proceeds shall be realized in freely convertible currency.
Though there are certain exceptions also to this rule where export proceeds are admissible in Indian Rupees (INR) and these exceptions are discussed later in this article.
Therefore, except for specified exceptions, it becomes essential for an exporter to receive his export payment in freely convertible currency.
In this blog, we shall explore what constitutes a freely convertible currency and the implications of receiving export payments in different currencies.
What is a Freely Convertible Currency?
Freely convertible currency is a currency that is widely traded in international foreign exchange markets and is widely used in international transactions. Examples of freely convertible currencies are the US dollar, Euro, Pound, and Japanese Yen.
Each currency that is freely convertible can be easily exchanged for gold or another currency.
However, the Indian Rupee (INR) is not considered a freely convertible currency.
Currency of Export Proceeds for Availing Export Benefits under Foreign Trade Policy
Receiving export proceeds in a currency other than freely convertible currencies is not permitted under the FEMA Regulations by the RBI (Reserve Bank of India) and the Foreign Trade Policy by the DGFT (Directorate General of Foreign Trade).
Complying with these regulations is essential to avail the benefits offered under the Foreign Trade Policy.
It is important to note that in general, export proceeds realised in Indian Rupees are not eligible for benefits or incentives under the Foreign Trade Policy as Indian Rupees is not a freely convertible currency. However, there are specific cases where export proceeds in Indian Rupees are allowed, as detailed further in the article.
Settlement of Export Proceeds in INR under Special Mechanism introduced by RBI
In July 2022, the RBI introduced a mechanism that allowed invoicing, payment and settlement of export and imports in Indian Rupees (INR).
This facility permits invoicing, payment, and settlement of exports and imports in Indian Rupees INR), subject to compliance with the guidelines outlined in the RBI’s A. P. Circular No. 10 dated 11th July 2022.
The mechanism requires an authorised Indian bank to open ‘Special Rupee Vostro Account’ of foreign bank of the foreign partner country in India.
Indian exporters who undertakes to export goods or services under this mechanism would receive payment in INR from the ‘Special Rupee Vostro Account’ of the correspondent bank (foreign bank) of the partner country.
Export proceeds realized in Indian Rupees (INR) as per this mechanism of ‘Special Rupee Vostro Account’ are permitted to avail export benefits /incentives under Foreign Trade Policy.
Other Mechanism of Export Proceeds realisation in INR allowed under FTP
Export proceeds against certain specific exports may also be realized in Indian Rupees, provided they are processed through a freely convertible Vostro account of a non-resident bank situated in any country other than a member country of the Asian Clearing Union (ACU), Nepal, or Bhutan.
Rupee payment through Vostro Account must be against payment in free foreign currency by buyer in their non- resident bank account. Free foreign exchange remitted by buyer to his non-resident bank (after deducting bank service charges) on account of this transaction would be taken as export realization under export promotion of FTP
Export Proceeds from Nepal and Bhutan
Export proceeds from Nepal and Bhutan can be received in Indian Rupees according to FEMA Regulations. However, these transactions are not eligible for the benefits provided under the Foreign Trade Policy as Indian Rupee (INR) is not a freely convertible currency.
