RBI allows NRIs to open rupee accounts abroad with authorized banks

The Reserve Bank of India (RBI), in consultation with the Central government, has undertaken a further review of the existing regulations issued under Foreign Exchange Management Act 1999 (FEMA) “to promote cross border transactions in INR and local/national currencies”, said a statement by the central bank on Thursday.

According to these new guidelines, RBI has allowed overseas branches of authorized dealer (AD) banks to open rupee accounts for non-residents for settlement of all current account and capital account transactions with Indian residents. AD banks are those authorized by the RBI to deal in foreign exchange or foreign securities.

For instance, a non-resident Indian (NRI) in the United States can now open a rupee account with the New York Branch of an AD bank in India. Under the new rules, the individual could also undertake capital account transactions in the form of investment in rupee assets. 

At present, non-residents can open only rupee accounts in India, and these can be utilized only for payments or receipts related to a limited set of permissible transactions.

Non-residents can now also settle transactions with other non-residents abroad using the balances in their rupee accounts. The guidelines also permit non-residents to use their balances held in rupee accounts for foreign investment, including foreign direct investment, in non-debt instruments.

These allow Indian exporters to open foreign currency accounts abroad to settle trade transactions, receive export proceeds and use these funds to pay for imports.

Bankers call it a landmark move by the central bank in a step towards making rupee an international currency.

“To start with, this will benefit non-resident Indians and gradually expand to the ecosystem of invoicing Indian exports and imports in INR,” said Srinivas Varadarajan, managing director & head of global emerging markets, Deutsche Bank India, one of the ADs registered with RBI. “As acceptability grows the INR could be increasingly used to settle international transactions between two jurisdictions a role being performed by the USD.”

These guidelines are part of the recommendations of an RBI committee set up in 2022, which proposed a roadmap to achieve internationalization of the rupee. The committee had recommended opening of rupee accounts only with the overseas branches of AD banks, to be followed later by opening of rupee account with any overseas bank and without any restrictions on transactions, depending based on the experience.

“Ability to open bank accounts in the currency of a country outside that country is a foundational element of internationalisation of a currency,” said the RBI committee report in July 2023. “An account in the currency of a resident country in the non-residents’ own jurisdiction allows them to leverage their existing financial relationships and provides them the flexibility to move funds and execute financial transactions in their time zone,” it added.

Over the last few years, RBI has been taking steps to promote the use of rupee for international trade and transactions.

In July 2022, RBI had put in place a mechanism in the form of Special Rupee Vostro account to settle international trade in rupees. This step was taken as precursor to enable India’s trade with Russia, which had been hit by difficulties in payment due to western countries’ sanctions on major Russian banks following the Ukraine war.

RBI has also signed a memorandum of understanding (MoU) with the central banks of the United Arab Emirates, Indonesia and the Maldives to allow exporters and importers to invoice and settle in their respective domestic currencies.

“The key in my opinion is efforts to be made to continue to grow INR as an invoicing currency for trade, settlement of international transactions and promote acceptability of the INR,” added Varadarajan.