The Rupee Vostro Account system is a financial arrangement that enables foreign banks to conduct transactions in Indian rupees with domestic banks. The term “vostro” is derived from the Latin phrase “in nostro vostro,” which translates to “in our account, in your account.” In this context, the domestic bank is referred to as the “vostro” bank, and the foreign bank is the “nostro” bank.
The Economic Survey (2022-23) had argued that the 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 added that the framework would also reduce the need for holding foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks. According to the survey, Indian exporters could get advance payments in INR from overseas clients and in the long-term promote INR as an international currency once the rupee settlement mechanism gains traction.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%.
The Reserve Bank of India (RBI) regulates the Rupee Vostro Account system, which allows foreign banks to maintain accounts with domestic banks to facilitate trade and investment activities in India. The system provides a secure and transparent mechanism for foreign banks to conduct transactions in Indian rupees without having to set up a local branch in India.
Foreign banks that wish to establish a Rupee Vostro Account must first obtain approval from the RBI. Once approved, the foreign bank can open an account with a domestic bank and deposit funds in Indian rupees. The domestic bank then manages the account and provides transactional services to the foreign bank, such as clearing and settlement, foreign exchange, and remittances.
The Rupee Vostro Account system operates on a bilateral basis, which means that each foreign bank must establish a separate account with a domestic bank. The system enables foreign banks to conduct a wide range of transactions in Indian rupees, including trade finance, investment, and remittances.
The Rupee Vostro Account system offers several benefits to foreign banks operating in India. These include:
- No requirement to set up a local branch in India: The system allows foreign banks to conduct transactions in Indian rupees without having to establish a local branch in India, reducing their operational costs and overheads.
- Access to the Indian market: The system provides foreign banks with access to the Indian market, enabling them to conduct trade and investment activities with domestic companies.
- Simplified transaction processing: The system offers a streamlined and efficient mechanism for foreign banks to conduct transactions in Indian rupees, reducing transaction processing times and costs.
- Mitigates currency risk: The system helps foreign banks to mitigate currency risk by allowing them to maintain funds in Indian rupees, thereby avoiding the need to convert funds into other currencies.
The Reserve Bank of India (RBI) has granted approvals to banks from 18 countries to open Vostro accounts to settle international trade in rupees. The central bank had granted 60 approvals in total so far to domestic and authorised foreign banks to open the ‘Special Rupee Vostro Accounts’ of correspondent banks from 18 countries, including those from major nations such as the United Kingdom and Germany.The 18 countries are as follows: Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and United Kingdom. Union Bank of India became the first bank in the country to open a Special Rupee Vostro Account through its corresponding bank in Malaysia i.e. India International Bank of Malaysia.
Banks from partner countries are required to approach an authorised domestic dealer bank for opening the SRVA. The domestic bank would then seek approval from the apex banking regulator providing details of the arrangement.Authorised banks can open multiple SRV accounts for different banks from the same country. Further, balances in the account can be repatriated in freely convertible currency and/or currency of the beneficiary partner country depending on the underlying transaction, that is, for which the account was credited.