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RBI’s Initiative to Broaden Rupee Vostro Account Usage in Cross-Border Trade
Context:
The Reserve Bank of India (RBI) is exploring the possibility of allowing a wider range of transactions through rupee vostro accounts, which could help further the international use of the rupee in trade. This initiative could enhance the utility of vostro accounts, advancing the RBI’s vision for rupee-denominated international trade.
Proposed Changes to Vostro Accounts:
RBI’s upcoming framework, expected within six months, may permit:
- Use of vostro funds in cross-border lending and capital account transactions.
- Loans to Non-Resident Indians (NRIs) from vostro-held rupee balances.
What are Nostro and Vostro Accounts?
- Nostro Account: A foreign currency account held by a domestic bank in another country for making international transactions on behalf of the domestic bank. “Nostro” is Latin for “ours” and is used by banks for maintaining foreign currency balances.
- Vostro Account: A rupee account held by a domestic bank on behalf of a foreign bank, allowing the foreign bank to make transactions, settle forex exchanges, and conduct cross-border payments in rupees. “Vostro” is Latin for “yours” and represents an account a foreign bank holds with a domestic one.
Benefits and Disadvantages of Nostro and Vostro Accounts:
Benefits:
- Facilitates international transactions by allowing banks to manage cross-border payments efficiently.
- Provides a means for foreign banks to engage in rupee-based transactions, reducing currency conversion needs.
- Encourages the use of the domestic currency (e.g., rupee), potentially reducing reliance on global reserve currencies.
Disadvantages:
- Exposure to currency exchange risk, especially when the domestic currency fluctuates significantly.
- Limited liquidity in certain situations, particularly in countries with restricted banking arrangements.
- Regulatory hurdles that may vary by country, limiting broader adoption and complicating compliance.
India’s Push for Rupee-Based Global Trade
- India’s government and the Reserve Bank of India (RBI) are actively promoting the rupee in international trade by allowing foreign entities to open rupee-based accounts, known as vostro accounts.
- Current agreements with around 20 countries facilitate these rupee transactions, with active usage in nations like Russia, Sri Lanka, and the Maldives.
Strategic Importance of Expanding Rupee Transactions
- These changes align with India’s long-term vision to make the rupee a more widely accepted currency in global markets.
- Increasing rupee-based transactions would help reduce dependency on the US dollar, especially in trade with regions like South Asia, Africa, and other emerging markets with strong ties to India.
Other recent RBI efforts to internationalise the rupee, such as
- Allowing foreign institutions to open rupee accounts.
- Promoting foreign direct investment (FDI) and foreign portfolio investment (FPI) in rupee-denominated assets.
- Extending Special Rupee Vostro Account (SRVA) agreements to 22 countries, including the UK and Russia.
Challenges and Next Steps
While the expansion of rupee vostro accounts has potential, several challenges remain:
- Indian Banks’ Participation: Major Indian banks have shown limited participation in SRVA agreements. Greater involvement from these banks is essential for scaling up rupee-based trade.
- Exporter Preferences for USD: Many Indian exporters still prefer to invoice in US dollars to avoid currency fluctuations, which may continue until the rupee gains more stability and acceptance.
- Infrastructure Development: Expanding India’s banking network in SRVA-partner countries and establishing digital banking solutions could support smoother rupee transactions abroad.
