Faster forex, fewer forms: RBI to revamp export-import regulations

The RBI is proposing easier foreign exchange regulations to make it easier for businesses to import and export goods and services.

The Reserve Bank of India plans to ease regulations to streamline foreign exchange transactions for exports and imports. The draft regulations, unveiled on Tuesday, looks to promote ease of doing business, particularly for small exporters and importers. The draft Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024, is expected to empower authorised dealer banks to provide quicker and more efficient service to their forex customers.

The draft regulations were released by the RBI under the Foreign Exchange Management Act (FEMA) for comments by September 1, 2024.

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New forex norms

According to the draft, exporters must declare the full value of their goods or services, which must be repatriated to India within nine months of the shipment of goods or the invoice date for services. AD banks can extend deadlines for both exporters and importers under specific circumstances. Exporters can receive an extension for valid reasons, while importers can get one for delayed payments or if the overseas supplier is behind schedule. Companies can use export earnings to pay for imports from the same company, but only if both transactions involve either goods or services.

Additionally, banks will need to develop and implement clear policies within six months for handling export and import transactions. These policies should be approved by the bank’s board and ensure smooth international trade practices without discrimination.

The RBI has also tightened its grip on advance payments for gold and silver imports. Sending money abroad upfront to buy precious metals will no longer be allowed. Instead, importers will need special permission from the RBI, unless they are qualified jewellers, in which case a specific exchange called the India International Bullion Exchange IFSC Ltd. (IIBX) can be used for advance payments.

For large and complex projects where payments are deferred, the apex bank is mandating stricter monitoring. Authorised dealer banks will need to actively track the progress of these projects by requesting regular updates from the exporter, ensuring that corresponding payments are made smoothly and on time.

The RBI is also establishing a system to flag exporters who are slow to pay back what they owe. If an exporter has an outstanding payment listed in the official system (EDPMS) for more than two years (including any extensions granted by the bank), they will be marked as “caution listed.” However, the exporter will be informed beforehand and given a chance to explain the situation before being flagged. Once they settle their dues, they will be removed from the caution list. 

Trade Restrictions in India

While India aspires to be a global economic leader, it places cumbersome trade and foreign exchange restrictions. These regulations aim to safeguard the economy, but at times, they might hinder India’s growth potential.

For instance, RBI regulations require currency derivatives on exchanges to be used solely for hedging. While a 2014 circular allowed some leeway, a recent policy change enforces stricter rules. This has led to speculators exiting the market, causing a significant drop in trading activity and liquidity.

The central bank is aware of the decline and has encouraged banks to participate more, but exchange costs may deter them. Foreign investors may shift to offshore markets like Singapore, Hong Kong, or Dubai, potentially increasing rupee volatility again. Analysts propose the RBI work with the government to loosen regulations on currency derivatives trading.

Navigating India’s trade regulations is a herculean task. Complex procedures, coupled with a lack of transparency, discourage new entrants. Small and medium enterprises (SMEs) are disproportionately affected, limiting their ability to compete in the global market and capitalise on international opportunities. Forex restrictions further dampen the country’s economic growth. Due to stringent controls, access to foreign capital is limited, which hinders investments crucial for infrastructure development and technological advancements. Moreover, these controls create an artificial scarcity of foreign currency, potentially leading to black market activity.

In light of this, the overhaul of existing rules is a welcome step. Economy watchers believe India must move towards a more liberalised trade and forex regime.

This is not to say that all caution should be abandoned. Rather, the focus should be on making the process easy and catalysing legitimate trade and investment. Both domestic and international businesses must be incentivised to invest and participate in the domestic market. A reformed trade and forex environment will propel India’s economic engine, paving the way for a more prosperous and globally integrated future.