Special INR Vostro Accounts

July 14, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

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Special INR Vostro Accounts

Subject : Economy

Section: External Sector

Context:

Government is getting a new avenue of borrowing with the Reserve Bank of India (RBI) enabled Special INR Vostro Accounts for investment in treasury bills (TBills) and GSecs.

Details:

The new mechanism for international trade settlement in the rupee facilitates returns on the surplus balances in such accounts.
The balance in Special Vostro accounts can be used for :
- Payments for projects and investments;
- export/import advance flow management
- investment in TBills and GSecs in terms of guidelines and prescribed limits, subject to the Foreign Exchange Management Act (FEMA) and similar statutory provisions.
This will encourage countries to have current account surplus with India to open Special Rupee Vostro Accounts and use the surplus to build rupee denominated assets.

Concept:

The settlement of trade transactions under this arrangement shall take place in INR.
In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, Authorised Dealer banks in India have been permitted to open Rupee Vostro Accounts.
For settlement of trade transactions with any country, AD banks in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
In order to allow settlement of international trade transactions through this arrangement, it has been decided that:
- Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.
- Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
Use of Surplus Balance: The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in Special Vostro Accounts can be used for:
- Payments for projects and investments.
- Export/Import advance flow management
- Investment in Government Treasury Bills, Government securities, etc. in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provision.

Existing Mechanism:

If a company exports or imports, transactions are always in a foreign currency (excluding with countries like Nepal and Bhutan).
So, in case of imports, the Indian company has to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.).
The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its needs, in most of the cases.

Vostro account:

Vostro is a Latin word that translates to “your,” as in “your account.”
A vostro account is an account a correspondent bank holds on behalf of another bank.
A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank.
Vostro account services include executing wire transfers, performing foreign exchange transactions, enabling deposits and withdrawals, and expediting international trade.
For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer’s behalf, the account is deemed by the holding bank as a vostro account of the insurance company.
From the foreign correspondent bank’s point of view, the funds held on behalf of other banks are referred to as vostro accounts and are denominated in the local currency. From the perspective of domestic banks, the funds deposited at correspondent banks are referred to as nostro accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank.