Explained | Vostro Accounts and how they facilitate trade

Source: The post is based on the article “Explained | Vostro accounts and how they facilitate trade” published in The Hindu on 21st February 2023

What is the News?

Government officials informed that 20 Russian banks have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.

What is a Vostro Account?

A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee. 

Domestic banks use it to provide international banking services to their clients who have global banking needs. 

It is an integral offshoot of correspondent banking that entails a bank to facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of the other bank.

What are Special Rupee Vostro Accounts (SRVA)?

SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system. 

For perspective, freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies (like the U.S. dollar or pound sterling) and for which a fairly active market exists for dealings against major currencies.

How does the framework function?

The framework entails three important components, namely, invoicing, exchange rate and settlement. 

Invoicing entails that all exports and imports must be denominated and invoiced in INR. 

The exchange rate between the currencies of the trading partner countries would be market ­determined. 

To conclude, the final settlement also takes place in Indian National Rupee(INR). 

How will this benefit?

The Economic Survey (2022-­23) 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.

Note: 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%.