India GIFT City foreign currency settlement system was unveiled this week to allow authorized banks and financial institutions to settle USD, EUR and other major currency payments directly through GIFT City, bypassing foreign correspondent banks. This direct settlement model is expected to reduce fees, cut delays, and strengthen India’s position in global trade and finance.
Under the new system, entities such as state-owned banks, private banks, fintech firms, and licensed forex operators can perform cross-border foreign currency trades with greater efficiency. The scheme will also enable faster payments for imports, exports, and remittance flows, benefiting sectors reliant on international transactions such as manufacturing, technology, and agriculture.
What the New Settlement System Entails
- Authorization: Regulators have designated certain institutions to participate in the system, ensuring they meet compliance and operational standards.
- Currencies Supported: USD, EUR, and other major currencies will be supported initially. Further expansion of currency basket is expected later or as per demand.
- Infrastructure: GIFT City’s financial infrastructure will host the clearing and settlement operations, so that participants can settle accounts directly in GIFT City without depending on foreign banks.
Impact on Trade and Business
The India GIFT City foreign currency settlement brings several benefits:
- Cost Reduction: Companies often pay high charges via correspondent banking networks. Direct settlement removes intermediary fees.
- Faster Transactions: Payments and settlements will happen more quickly, which helps businesses better manage cash flow.
- Reduced Currency Risk: When payments are delayed via multiple intermediaries, currency fluctuations can hurt trade margins. This system limits that exposure.
- Competitive Advantage: Exporters and importers will gain more predictability and efficiency, making Indian products and services more competitive in global markets.
Challenges & Operational Requirements
However, implementing this system will require careful attention to several issues:
- Compliance and Risk Management: Participating banks must meet strong KYC, AML, and regulatory oversight to prevent misuse.
- Technical Infrastructure: Robust IT systems, cybersecurity protocols, and disaster recovery plans will be required to ensure stability.
- Liquidity and Forex Reserves: There must be sufficient foreign currency liquidity to settle large-scale transactions without causing tightness in foreign reserves.
- Regulatory Harmonization: Laws and policies, both in India and in partner countries, must align to ensure smooth operation and acceptance of settlement certificates or documents from GIFT City.
Broader Strategic Significance
For India, this settlement system represents a step toward greater financial autonomy. It aligns with the government’s vision of making GIFT City a global financial hub with world-class infrastructure.
By reducing reliance on foreign correspondent banks — especially amid geopolitical tensions and changing sanction regimes — India strengthens its ability to control trade flows and manage financial risk.
Sectoral Effects
Several sectors stand to benefit significantly:
- Exporters: They can get paid faster and with fewer deductions.
- Remittances/FinTech: Entrepreneurs and fintech platforms can improve cross-border payment speed and cost.
- Manufacturers and Importers: They can reduce input costs and inventory turnaround times.
Global Context & Comparison
Direct foreign currency settlement hubs are increasingly popular globally. Major financial centers often offer local settlement mechanisms to enhance trade resilience. For example, Dubai and Singapore have long supported settlement systems that reduce reliance on foreign banks.
India’s move via GIFT City puts it in a better position to attract foreign investment and integrate with global supply chains.
Future Outlook & Expansion
Looking ahead, the following steps will be key to maximizing the system’s benefits:
- Expanding the list of participating banks and fintech firms.
- Supporting more currencies and payment corridors.
- Strengthening trade treaties and financial agreements to recognize GIFT City settlement mechanisms internationally.
- Ensuring transparency and reporting so businesses have confidence in settlement finality and legal enforceability.
India GIFT City foreign currency settlement system is a policy innovation likely to influence how emerging economies approach cross-border payment reform.
Source: Reuters
