Currency convertibility and the rupee now

Currency convertibility refers to the how easily a country's currency can be converted to another country's currency or gold. It is important for a country's currency to be convertible for the needs of international commerce. Globally sourced goods must be paid in an agreed-upon currency and that may not be the buyer's domestic currency. 

A country's currency can either be fully convertible, partially convertible or non-convertible. India's currency has been convertible on the current account since 1994. This means that it can be converted to foreign currency for trade related purposes. Exporters and importers can receive and make payments for services rendered. To preserve foreign exchange reserves, governments limit currency convertibility and in such cases barter-like agreements take place where a range of goods and services are exchanged for other goods and services. 

The US dollar and the Euro are among the world currencies that are fully convertible. This means they can be easily exchanged gold or another currency. They do not have any government restrictions on currency exchange. Such fully convertible currencies are inexpensive to buy and sell hence, trading on such currencies becomes easy. 

The Reserve Bank on Monday has given its decision to allow trade to settle in rupee. The exports and imports can be denominated in rupees now on. This means internationalization of the Indian rupee. This has the potential to reduce foreign currency risk to traders and help navigate payment hurdles to Russia. With Russia under sanctions, making payments to Russia has been a hassle and this could help ease the situation. This move would also supposedly reduce the risk of forex fluctuation, specially looking at euro-rupee parity and this could be considered a first step towards 100% convertibility of the rupee.

A vostro account: It is a bank account opened in its home country on behalf of a foreign bank. Exporters have been waiting for a payment mechanism with Russia to trade goods that do not face sanctions like pharma and food products. If a trading partner agrees for billing in rupees, they will make or receive payments to a special rupee vostro account that Indian banks have been allowed to open on behalf of foreign partners.