Apparently on March 1st will get the needful instructions from Indian regulatory bodies and most probably from March 3rd 2010 Paypal India users can withdraw their money to their Indian bank accounts. However as part of the changes Paypal will ask to fill out a new field entitled 'Export Code' whenever you request a withdrawal to your bank accounts, which will identify the nature of cross-border merchant transactions to Indian banks.
Also, Paypal reports that after making all these changes into their system, PayPal will set to be more powerful engine for exporters in India. With purpose codes for export transactions and FIRCs (Foreign Inward Remittance Certificates), one will also get the export related benefits.