The Reserve Bank of India “RBI”, the supervisor of the financial system, had provided approval to two more lenders, i.e., HDFC Bank and Canara Bank, to open a special Vostro Account. According to the sources, it opens the door for cross-border trading in Indian currency and allows for trade in rupees with Russia. However, other than that, three Indian banks—UCO Bank, Union Bank, and IndusInd Bank—had already gotten regulatory approval from the RBI.
Dive deeper into this article to understand the basics and importance of the “Vostro Account.”
What is a Vostro account?
A “Vostro Account” means when a foreign correspondent bank acts as an agent and holds funds on behalf of another bank in order to provide services. The correspondent bank acts as a caretaker or financial intermediary, holding funds or finances on behalf of a foreign counterpart. “Vostro” is a Latin phrase that means “Yours.” It thus signifies that when we say “Vostro Account,” we indicate “Your Account.”
Customers can conduct withdrawals, deposits, and other transactions more easily and smoothly in countries where the local bank doesn’t exist by using the Account. In addition, the domestic bank is responsible for paying the correspondent bank’s charges for the services related to the Vostro account.
How Does a Vostro Account Function?
Suppose, Ram is an importer and exporter from India. He strikes a contract to import goods with a German exporter. For the items he is importing, he must pay the German merchant an amount. Previously, the importer first converted the amount into US dollars. The exporter would then convert the dollar into local currency after receiving it. It cost extra charges and a lot of time. However, the conversion is no longer necessary because of the Vostro Account. As the German merchant’s “Special Vostro Account” will be credited with rupees. Further, he will receive it in the local currency.
Simultaneously, Ram exports some items to a German merchant, for whom he must then be paid. In this case, the Vostro Account will be debited, and the amount will be credited to Ram’s a/c, which is the exporter’s account.
Why is the rupee used to settle international trade?
The central bank began using a new procedure for rupee-based foreign trade settlement in July. In the past, countries’ only choice for importing and exporting goods and services was to first settle the payments in a foreign currency. Since the US dollar is the world’s most reserved currency, the majority of trade is conducted in US dollars. It increases the worth and dependency of US dollars.
An Indian buyer can easily transmit an invoice made in Indian rupees to a party with a rupee account by using the Vostro Account. It will cut down on conversion costs and volatility in currency exchange rates. As a result, there is no need to pay in US dollars and then have the receiving party convert it into the local currency.
The Account seeks to advance trade in India and settle invoices and payments in Indian rupees. In addition, it would also limit dollar outflows. It is necessary for this crucial time when the local currency is losing value.
On behalf of India’s growing trade imbalance, this drastic action has been taken. Vostro accounts helped facilitate larger foreign exchange transactions. It is also thought to reduce the cost of commodity imports. Moreover, they are easy to operate and provide ease of access.