Why in the Headlines?
For the purpose of settling rupee payments for trade between India and Russia, the Reserve Bank of India (RBI) has permitted the opening of nine special vostro accounts in two Indian banks UCO Bank and IndusIand Bank.
Sberbank and VTB Bank, the two biggest banks in Russia, are the first foreign lenders to gain RBI authorisation for rupee settlement of international trade transactions.These banks have established unique vostro accounts in their corresponding Delhi branches.
What is Vostro Account?
Vostro means 'Yours' in Latin. It's a bank account that enables clients to make deposits on behalf of other banks.
Vostro accounts allow domestic banks to offer their customers who require international banking services access to those services.Vostro account services include performing foreign exchange transactions, permitting deposits and withdrawals, and facilitating international trade. They also involve performing wire transfers.
The Story Behind
To encourage the expansion of foreign trade, with a focus on Indian exports, and to advance the rupee as a worldwide currency, the RBI introduced a system to settle transactions in rupee in July 2022.
Due to sanctions put in place by the US and Europe in response to Moscow's invasion on Ukraine, a significant portion of bilateral trade between India and Russia is getting settled in the rupee.
The RBI's finalised procedure allows banks from partner nations to contact authorised dealer banks in India to open unique rupee vostro accounts. The authorised dealer bank will next need to submit the specifics of such an agreement to the central bank for approval.
Rupee Payment System
In India, Rupee Vostro Accounts may be opened by Authorized Dealer Banks.
Indian importers who use this system for imports will pay in INR against the invoices for the supplies of goods or services from the foreign seller, and that payment will be credited into the Special Vostro account of the correspondent bank of the partner country.
The balances in the designated Special Vostro account of the correspondent bank of the partner country would be used to pay Indian exporters who use the mechanism the export revenues in INR.
Through the aforementioned rupee payment mechanism, Indian exporters may get advance payments in Indian rupees from foreign purchasers against exports.
Indian banks must make sure that any available funds in these accounts are utilised to fulfil payment commitments resulting from already-completed export orders or upcoming export payments before permitting any such receipt of advance payment against exports.
2. Payments for projects and investments, management of export/import advance flow, investment in government Treasury Bills, and other uses are all possible with the balance in Special Vostro Accounts.
Current Mechanism
Transactions made by a corporation whether it exports or imports are always made in a foreign currency (excluding with countries like Nepal and Bhutan).
Therefore, the Indian corporation must pay in foreign currency for imports (mainly dollars and could also include currencies like pounds, Euro, yen etc.).
Conclusion
The New Mechanism will assist the expansion of international trade is several ways:
It will help in developing and growing the interest in the Indian rupee among traders worldwide.
Helps in improving and regularizing the trade with Russia that has essentially been at a stop since the sanctions were imposed on Russia due to Russia-Ukraine conflicts.
When comes to the Forex Fluctuations the action would result in reducing the risk of currency fluctuations, particularly when considering the parity between the euro and the rupee.
By encouraging rupee settlement of trade flows, this method seeks to lower demand for foreign money amid continuous rupee depreciation.