In global economics, financial aspects including foreign trade, currency depreciation and appreciation, and international sanctions significantly influence their respective economies. With the ever-changing global dynamics, it is crucial to understand these concepts for effective financial management and policy making.
The Role of Global Sanctions and Balance of Payments
Global sanctions – punitive measures adopted by countries against others for political reasons – often have profound implications on targeted nations. They can hinder economic growth and distort the balance of payments, which is a record of a country’s international transactions over a certain period.
The Internationalization of Rupee: A Wider Perspective
In July 2022, the Reserve Bank of India (RBI) introduced a mechanism to settle international transactions in Rupee. Its aim is to bolster global trade, particularly exports from India, and position the Rupee as an international currency. This measure may also facilitate trade with countries facing sanctions, such as Russia.
Special Rupee Vostro Accounts (SRVA): A Bridge to Easier Trade
Recognizing this move, 20 Russian banks opened SRVAs with Indian partner banks to streamline payment settlement for Indo-Russian trade. Major domestic banks in India have also listed nodal officers to resolve issues exporters might face under this arrangement.
Unpacking the SRVA Arrangement and Its Functioning
A Vostro account allows domestic banks to hold funds for foreign banks in the domestic currency, in this case, the Rupee. The SRVA is merely an additional arrangement that compliments freely convertible currencies to facilitate trade.
Three key components of this framework include invoicing, exchange rate, and settlement. All export and import transactions must be denominated and invoiced in INR, exchange rates are determined by market forces, and the final settlement also occurs in INR.
Eligibility Criteria for Banks
To open a SRVA account, domestic banks must seek permission from the regulatory body, showcasing details of such an arrangement. They must ensure that the corresponding bank is not from a country listed in the Financial Action Task Force (FATF)’s High Risk & Non-Cooperative jurisdictions.
The Purpose and Impact of SRVA Arrangement
The arrangement aims to decrease the demand for foreign exchange for settling current account-related trade flows. It reduces vulnerability to external shocks and transforms the Rupee into an international currency. It will also help solve payment issues with sanction-struck countries such as Russia.
Understanding Nostro Accounts
Unlike a deposit account held by individual depositors, a Nostro account is held by a bank in another bank, typically when they lack branches in a foreign country. This practice allows customers to deposit money into the foreign bank’s account, where it can then be transferred to the original bank.
For instance, if Bank A, lacking branches in Russia, opens a Nostro account with Bank B (located in Russia), Russian customers wanting to send money to Bank A can deposit it into Bank A’s account in Bank B. Bank B then transfers the funds to Bank A.
Public Service Examination Question: The Convertibility of Rupee
In 2015, public service examination candidates were asked: What does the Convertibility of Rupee imply? The answer was – freely permitting the conversion of rupee to other currencies and vice versa. This question highlights the importance of understanding such financial mechanisms from a broader perspective.
