Context: According to recent reports, twenty Russian banks, including Gazprom, Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow, have opened rupee vostro accounts with authorised dealer banks in India to enable rupee trade between the two countries.
About Vostro Account
- A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee.
- Domestic banks use it to provide international banking services to their clients who have global banking needs.
- It is an integral offshoot of correspondent banking that entails a bank (or an intermediary) to facilitate wire transfer, conduct business transactions, accept deposits and gather documents on behalf of the other bank.
- It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
About Special Rupee Vostro Accounts (SRVA)
- SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system.
- Freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies (like U.S. dollar or pound sterling) and for which a fairly active market exists for dealings against major currencies.
- Functioning of SVRA
- Invoicing entails that all exports and imports must be denominated and invoiced in INR.
- Exchange rate between the currencies of the trading partner countries would be market-determined.
- Settlement in Indian National Rupee (INR): The authorised domestic dealer banks (those authorised to deal in foreign currencies) are required to open SRVA accounts for correspondent banks of the partner trading country.
- Eligibility criteria of banks
- The domestic bank would then seek approval from the apex banking regulator providing details of the arrangement. All reporting of cross-border transactions is to be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.
- Responsibility of the domestic banks to ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions.
- Authorised banks can open multiple SRV accounts for different banks from the same country.
- Balances in the account can be repatriated in freely convertible currency and/or currency of the beneficiary partner country depending on the underlying transaction.
Significance Vostro Account
- Economic Survey (2022-23) said that such framework could largely reduce the net demand for foreign exchange, the U.S. dollar in particular, for the settlement of current account related trade flows.
- It would reduce the need for holding foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks.
- As per the Bureau for International (BIS) Settlements’ Triennial Central Bank Survey 2022, the U.S. dollar was the most dominant vehicle currency accounting for 88% of all trades.
- The INR accounted for 1.6%.
- In July 2022, the RBI allowed international trade in rupees, creating the possibility of doing business with Russia in rupees
- Trade in rupee will insulate India’s exports from foreign currency fluctuations.
- In long-term, it could promote INR as an international currency once the rupee settlement mechanism gains traction
- Rupee trade mechanism will allow India to pay for Russian oil and fertilisers in rupees, which can be then used by Russian companies to pay for their imports from India or invest in the country.
- It could marginally narrow India’s widening trade deficit by reducing the price of commodity imports.
- Nostro means ‘ours’ and Vostro means ‘yours’ in Latin.
- Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where.
- Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts.