Main Note - [External Sector](External%20Sector.md) ### 1. The Asian Clearing Union (ACU) 1. The Asian Clearing Union (ACU), started in 1974, is presently operating as a clearing and payment system among ACU members (Bangladesh, Bhutan, Iran, India, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka) for the promotion of trade among the participating countries. 1. On December 9, 1974, at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), Asian Clearing Union (ACU) was established to promote regional co-operation. 2. The headquarters are in Tehran (Iran). 3. Though the ACU mechanism envisages the use of domestic currencies for trade settlements, due to operational convenience and usage, currently only the ==USD, Euro and JPY== are eligible as currencies for payment 1. The Asian Monetary Units (AMUs) is the common unit of account of ACU and be denominated as ‘ACU Dollar’ (1996) and ‘ACU Euro’ [(2009)](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=4718), which is equivalent in value to one US Dollar and one Euro, respectively.  2. All instruments of payment shall be denominated in AMUs like 100 AMU$ (ACU Dollar). **Mechanism for settlement through the Union** 4. *RBI receives/pays from/to AD Category-I banks* The Reserve Bank has been undertaking to receive and pay U.S. Dollars, effective 1st January 1996 and Euros, effective 1st January 2009, from/to AD Category-I banks for the purpose of funding or for repatriating the excess liquidity in the ACU Dollar and ACU Euro accounts respectively, maintained by the AD Category-I banks with their correspondents in the other participating countries. 1. *RBI receives from AD Category-I Bank* 1. **Leg 1 -** RBI receives an intimation that equivalent amount of U.S. Dollar and Euro is being credited to its account with the Federal Reserve Bank of New York, New York, and its account with the Deutsche Bundesbank, Frankfurt respectively, by the AD Category-I bank on the value date. 2. **Leg 2 -** Funding of ACU Dollar and ACU Euro account maintained with a correspondent bank in another ACU participant country is affected by RBI 2. *RBI pays to AD Category-I Bank* 1. **Leg 1 -** RBI receives an intimation of surrender of surplus funds, of AD Category-I bank in India, to the other participant Central Bank. 2. **Leg 2 -** Reserve Bank will arrange for payment of US Dollar and Euro from its accounts with the Federal Reserve Bank of New York, New York and the Deutsche Bundesbank, Frankfurt respectively, to the nostro account (maintained abroad with a foriegn correspondent) of the AD Category-I bank. 5. *RBI receives/delivers from/to foreign banks* The Reserve Bank has also been receiving and delivering U.S. Dollar and Euro amounts for absorbing liquidity or for funding the ACU Dollar (vostro) and ACU Euro (vostro) accounts respectively, maintained with the AD Category-I banks on behalf of their overseas correspondents. 1. *RBI receives from foreign banks's Vostro accounts 1. **Leg 1 -** RBI receives from foreign banks's Vostro accounts 1. The overseas correspondents will send instructions to the AD Category-I banks to surrender excess liquidity in their ACU Dollar and ACU Euro accounts to the Reserve Bank. 2. In such cases the AD Category-I banks will have to actually remit the U.S. Dollar and Euro amounts to the account of Reserve Bank with the Federal Reserve Bank of New York, New York and Deutsche Bundesbank, Frankfurt respectively, on the value date 2. **Leg 2** - RBI advises the other participant central banks to make the U.S. Dollar and Euro amounts available to the commercial banks in their countries. 2. *RBI delivers to foreign banks's Vostro accounts* 1. **Leg 1** - The other participant central bank receives USD/Euro from the commercial bank in its country. 2. **Leg 2** - RBI receives instruction from the participant Central Bank to fund their commercial bank’s ACU Vostro account in India 1. RBI credits U.S. Dollar and Euro amounts to the Nostro Accounts of the AD Category-I banks. 2. The AD Category-I banks will credit the U.S. Dollar and Euro amounts to the ACU Dollar and ACU Euro accounts respectively, of the foreign commercial banks of the participating countries concerned on the value date. 6. ==Summary of clearing mechanism== 1. When a commercial bank wants to bring money back from its ACU Dollar/Euro account held abroad, it can sell that ACU balance either to another commercial bank in its own country or to its own central bank. If it sells to the central bank, the central bank will use the ACU mechanism to bring the funds home. The foreign correspondent bank will give the equivalent USD/Euro to its own central bank. That foreign central bank will then instruct the central bank in the receiving country to pay the commercial bank locally. The receiving central bank may make this payment in USD/Euro or in local currency. After the payment is made, the receiving central bank will inform the ACU Secretariat so that the ACU debits the first central bank’s account and credits the receiving central bank’s account. 2. When a commercial bank wants to fund its ACU Dollar/Euro account abroad, it can buy the needed ACU amount either from another local bank or from its own central bank. If it buys from the central bank, it gives USD/Euro (or local currency, if the central bank allows) to its own central bank, which then uses the ACU mechanism. This central bank will then instruct the foreign central bank to pay the equivalent USD/Euro to the foreign commercial bank. After the payment is made, the foreign central bank will inform the ACU Secretariat so that the ACU debits the first central bank’s account and credits the receiving (foreign) central bank’s account 7. Here instead of using dollars/euros (mostly) for each bilateral trade separately, members settle all these payments together at the end of a fixed period. 3. Settlement is on a multilateral net basis - Only the final net difference is settled, using USD or EUR (or earlier, the now-discontinued ACU dollar/ACU euro). This is called _netting out payments multilaterally._ 4. ACU started operations in 1975. 5. This reduced the transaction costs and also "optimized" the use of forex reserves. 8. Currently, the trade settlement with Sri Lanka has been permitted outside the ACU mechanism. 9. RBI had proposed the use of local currencies of members for settlement of ACU transactions to reduce reliance on USD and EUR, along with INR also being included as one of the settlement currencies under the ACU. 10. The idea of initiating the use of domestic currencies within the ACU mechanism is to *facilitate the process of internationalisation of INR* on a pilot basis in a closed environment where the framework can be tested, and various operational glitches and roadblocks could be addressed. 11. The proposed expansion of ACU, by including more countries, would further this process as this would increase the geographical reach of the ACU mechanism. 12. The details of the proposal and the process of operationalization of INR as an alternate currency in ACU are placed in [Annex 3.1](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1244#AN31). 13. As India runs a trade surplus with most countries in ACU, India will be acquiring the currencies of other countries, which may be invested in those countries. 14. However before this, countries would have to examine the various areas where the trade surpluses can be utilised, such as for investing in FDI, FPI, interest-bearing fixed deposits, government securities, corporate bonds or netting through invisibles, including tourism. 15. The details of the proposal and the process of operationalisation of INR as an alternate currency in ACU are placed in [Annex 3.1 of this report](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1244#AN31) 16. [May 19, 2022](RBI_Notification_20220519_Government%20of%20India%20guaranteed%20term%20loan%20extended%20by%20SBI%20to%20the%20Government%20of%20Sri%20Lanka-%20Settlement%20in%20INR.pdf) 1. March 17, 2002 - State Bank of India (SBI) had signed a credit facility agreement, for financing by State Bank of India of export/purchase of eligible goods and services (essential goods) from India by Sri Lanka with the help of Government of India guaranteed USD 1000 million term loan to Sri Lanka 2. RBI allowed to settle trade permitted under this arrangement in INR outside ACU mechanism ## Bilateral Trade payments in INR ### 1. Iran and India 1. This [[Bilateral Trade Payments between India and Iran|note]] note discussed how bilateral trade payments between India and Iran were settled after sanctions on Iran. ### 2. Non-Resident Rupee accounts for trade 1. [[Deposits and Accounts#^bc9e68|SRVA]] are special Rupee Vostro accounts held by foreign banks/overseas correspondents with AD Category-I banks for settlement of trade transactions. 2. [SNRR](Deposits%20and%20Accounts.md#^03c1b2) accounts are Rupee accounts held by non-resident entity for any permitted business activity like ECB in INR, trade credits in INR, trade (Export/ Import) invoicing in INR, etc. 3. ==Related Note - [Deposits and Accounts](Deposits%20and%20Accounts.md#^19b51a)== **International Trade settlements in INR - Timeline** 1. [July 11, 2022](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12358&Mode=0) - Special Rupee Vostro accounts (SRVA) - RBI announced a new type of account, Special INR Vostro Account, for settlement of trade transactions in INR, on [July 11, 2022](RBI_Notification_20220711_International%20Trade%20Settlement%20in%20Indian%20Rupees%20INR.pdf) to continue trade transactions between Russia which was sanctioned by US due to its invasion of Ukraine. 2. They are special Rupee Vostro accounts held by foreign banks/overseas correspondents with AD Category-I banks for *settlement of trade transactions*. 3. [FAQs]((https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=3373) - Special Rupee Vostro Account (SRVA) 4. [FAQs](https://rbi.org.in/scripts/FAQView.aspx?Id=151) - International Trade Settlement in Indian Rupees (INR) 5. [Nov 17, 2023](RBI_Notification_20231117_International%20Trade%20Settlement%20in%20Indian%20Rupees%20(INR)%20–%20Opening%20of%20additional%20Current%20Account%20for%20exports%20proceeds.pdf) - Opening of additional Current Account for exports proceeds 1. AD Category-I banks maintaining Special Rupee Vostro Account as per the provisions of the Reserve Bank circular dated July 11, 2022 referred above are permitted to open an additional special current account for its exporter constituent (client) exclusively for settlement of their export transactions 6. [June 11, 2024](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12693) - the above flexibility was extended to both export and import transactions 7. [Aug 5, 2025](RBI_Press%20Release_20250805_International%20Trade%20Settlement%20in%20Indian%20Rupees%20(INR)%20–%20Revised%20procedure%20for%20opening%20of%20Special%20Rupee%20Vostro%20Account%20(SRVA).pdf) -  it was [decided](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=12887) to do away with the need for seeking RBI approval for opening of SRVA 8. [Aug 12, 2025](RBI_Notification_20250812_Investment%20in%20Government%20Securities%20by%20Persons%20Resident%20Outside%20India%20through%20Special%20Rupee%20Vostro%20account.pdf) - RBI further relaxed rules, permitting funds in these accounts to be [invested](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12765) freely in government securities and treasury bills, without registering as a FPI. 1. It is covered in Master Direction - *Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions*, 2025 9. [Oct 03, 2025](RBI_Notification_20251003_Investment%20in%20Corporate%20Debt%20Securities%20by%20Persons%20Resident%20Outside%20India%20through%20Special%20Rupee%20Vostro%20account.pdf) - AD banks were [permitted](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12910) investment *(by their correspondent banks)* of the surplus balances in their Special Rupee Vostro Accounts also in non-convertible debentures/bonds and commercial papers issued by an Indian company ### 2.1 Russia and India 1. July 11, 2022 - RBI announced SRVA to continue trade transactions between Russia which was sanctioned due to its invasion of Ukraine. 2. With this Indian banks, could not send USD (or any of the G7 currency) payments to Russia through their nostro accounts. 3. It could trade only through un-sanctioned banks and in currencies like LIRA, INR, CNY, AED, Saudi Rial, Egyptian Pound, Kazakh Tenge, etc. 4. Many Russian banks opened Special Vostro Rupee Accounts (SRVA) with several Indian banks. 5. As of Nov 2025, many Sri Lankan banks like Seylan Bank, NDB Bank, People’s Bank of Sri Lank, etc have also opened SRVA with Indians banks like SBI, Indian Bank, etc. ### 2.2 UAE and India 1. July 15, 2023 - India signed an [[Agreements between UAE and India|agreement]] with the United Arab Emirates to settle trade in rupees (and AED) instead of foreign currency like US dollars. ## Local Currency Settlement System (LCSS) - INR & Local Currency 1. As of [Feb 7, 2025](Sansad_20250207_Internationalisation%20of%20Indian%20Rupee.pdf), RBI has entered into Local Currency Settlement System (LCSS) arrangements with UAE, Indonesia and Maldives for encouraging settlement of cross-border trade in INR and the local currency of the partner country. 2. [July 15, 2023](Agreements%20between%20UAE%20and%20India.md#Bilateral%20trade%20agreement%20between%20UAE%20and%20India) - RBI and the Central Bank of UAE (CBUAE) signed two MoUs in Abu Dhabi for 1. establishing a Framework to Promote the Use of Local Currencies viz. the Indian rupee (INR) and the UAE Dirham (AED) for cross-border transactions; and 2. cooperation for interlinking their payment and messaging systems. ## All Foreign Currencies for trade settlement - INR & All Foreign Currencies 1. [December 21, 2023](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12579&Mode=0) - FEM (Manner of Receipt and Payment) Regulations were modified to allow cross border transactions in all foreign currencies (including local currencies of trading partner countries) and INR. 1. It superseded [FEM (Manner of Receipt and Payment) Regulations, 2016](RBI_Regulations_20160502_Foreign%20Exchange%20Management%20(Manner%20of%20Receipt%20and%20Payment)%20Regulations,%202016_WITHDRAWN.pdf) > [Box X.5 - Local Currency Settlement in the Changing Global Financial Order](RBI_Annual%20Report_2025.pdf#page=217&selection=275,0,275,64) in the RBI Annual Report 2025 ## Regulations 1. Regulations 3 and 5 of [FEM (Manner of Receipt and Payment) Regulations, 2016](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10392&Mode=0) governs terms of which export / import transactions between ACU member countries are to be routed through the ACU mechanism. 2. ==More in the note [Exports & The RBI](Exports%20&%20The%20RBI.md#Act/Rules/Regulations/Master%20Directions) and [Deposits and Accounts](Deposits%20and%20Accounts.md)== ## Related Notes 1. [Link](Bilateral,%20Multilateral%20Swaps,%20LoC,%20Liquidity%20Arrangements.md#Related%20Notes) ## References 1. RBI. (2003, June 16). *Bimal Jalan: A review of the Asian Clearing Union* \[Speech\]. [Link](https://www.bis.org/review/r030710c.pdf) 2. RBI. FAQ on [International Trade Settlement in Indian Rupees (INR)](https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=3373)