The Reserve Bank of India (RBI) has approved two Indian Banks, UCO Bank and IndusInd Bank to open nine special vostro accounts for settling trade payments in rupee between India and Russia. In an attempt to expand global trade and push the rupee as an international currency, RBI initiated this move in July 2022. Notably, it is intended to facilitate trade with sanction-affected nations like Russia. This new system allows banks from participating countries to apply to authorized dealer banks in India to open special rupee vostro accounts.
Meaning of Nostro Account
A Nostro account, originating from the Latin word for “ours”, is an account held by one bank in another bank. It serves as a conduit for customers to deposit money into the account of one bank held in another bank. For instance, if bank A doesn’t have any branches in Russia, but bank B does, bank A can establish a Nostro account with bank B to receive deposits from Russia. Nostro accounts differ from standard deposit accounts as they are held by foreign institutions instead of individual depositors.
Explanation of Vostro Account
The term Vostro, which translates to “yours” in Latin, refers to a bank account opened by one bank on behalf of another. Bank B would call this a Vostro account in our previous example. Payments on behalf of the account holder’s bank are accepted through the Vostro account. These accounts are generally held in a foreign denomination and allow domestic banks to offer international banking services to clients with global needs. Services include wire transfers, foreign exchange transactions, facilitating deposits and withdrawals, and enabling international trade.
Rupee Payment Mechanism Defined
Under this mechanism, Authorized Dealer Banks in India can open Rupee Vostro Accounts. Payments for imports are made in INR by Indian importers. These payments are credited into the Special Vostro account of the correspondent bank of the partner country. Similarly, Indian exporters receive payments from these accounts as well. Indian banks need to ensure that funds in these accounts are first used to fulfil obligations from executed export orders before any advance payment is received against exports. The balance in these accounts can be used for project and investment payments, managing export/import advance flow, and investments in Government securities.
Existing Trade Mechanism
Currently, when a company engages in import or export, transactions are conducted in a foreign currency (except for countries like Nepal and Bhutan). For imports, an Indian company is required to make payments in foreign currency. When exports occur, the company receives foreign currency which is converted into rupee to meet its needs.
Benefits of the New Mechanism
The new mechanism is designed to promote growth in global trade and cater to the international trading community’s growing interest in INR. Trade complications with Russia due to imposed sanctions and payment issues are expected to mitigate through this initiative. Moreover, the mechanism is anticipated to minimize the risk of forex fluctuation, specifically concerning the Euro-Rupee parity. Amid the ongoing weakness of the rupee, the mechanism targets to curtail the demand for foreign exchanges by promoting rupee settlement.