What are Vostro accounts and how do they facilitate trade?
- India has given nine banks approval to open “vostro” accounts to help facilitate trade in rupees with Russia.
What is a Vostro account?
- A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency — which, in the case of India, is the rupee.
- When an Indian importer wants to make a payment to a foreign trader in rupees, the amount will be credited to this Vostro account, and when an Indian exporter needs to be paid for supplying goods or services, this Vostro account will be deducted, and the amount will be credited to the exporter’s account.
- The exchange rate between the Indian currency and those of trading partners is market-determined, and settlement takes place in rupees.
- When countries import and export goods and services, they have to settle payments in a foreign currency. Since the US Dollar is the world’s reserve currency, most of the trade occurs in US dollars. Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations.
- With the help of a Vostro account, instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.
- This could largely reduce the net demand for foreign exchange for the settlement of current account related trade flows. Further, the use of INR in cross-border trade is expected to mitigate currency risk for Indian businesses.
- It also reduces the need for holding foreign exchange reserves and dependence on foreign currency, making the Indian economy less vulnerable to external shocks.
- Further, in the longer term promote INR as an international currency once the rupee settlement mechanism gains traction.
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