Indian Bank to hold special Rupee Vostro accounts of 3 Sri Lanka banks
Posted on January 9th, 2023

Courtesy The Firstpost

With the help of Vostro account in local currency, Sri Lanka will be able to seamlessly import from neighbouring India without worrying about its depleting dollar supply.

New Delhi: Economic crisis-hit Sri Lanka has been keen to trade in the Indian rupee and to speed up the process, an Indian public sector bank – Indian Bank –  has received a regulatory approval to hold special Vostro accounts of three banks from the South Asian island nation.

Notably, Indian Bank, headquartered in southern India’s Chennai, has had a long presence in Sri Lanka. The financial institution is expected to activate the special accounts in about a week.

A report by Economic Times quoted a person aware of the clearance saying, RBI (Reserve Bank of India – the country’s central bank) has given permission for three vostros…. The accounts are expected to be functional any day now.”

With the help of Vostro account in local currency, Sri Lanka will be able to seamlessly import from neighbouring India without worrying about its depleting dollar supply.

The Vostro accounts would also aid Sri Lanka utilise rupee lines extended by India and would contribute towards stabilising the economy of Colombo.

Last month, Sri Lanka agreed to used Indian rupee (INR) for international trade.

What is rupee trade settlement mechanism?  

Last year in July, the RBI opened up rupee trade. It came at a time when the dollar was appreciating at a very fast rate. Also, a lot of sanctions were imposed on Russia.

To mitigate both the issues, the central bank of India – RBI – came up rupee trade mechanism.

How does it work?

Rupee trade settlement mechanism is a method of using INR instead of dollars and other big currencies for international transactions.

Now, trade transactions are done in US dollar since it is the globally accepted payment benchmark.

With the rupee trade mechanism, the exporter can receive or pay remittances in rupee.

For the unversed, dealing and payments of most of imports, including crude oil and several overseas transactions by India have to be paid in US dollar.

India has to sell INR to buy dollars to pay OPEC (Organization of the Petroleum Exporting Countries) for its oil imports.

Also, INR is not fully convertible and, therefore, it is often difficult to get buyers for it. On the other hand, USD has higher demand as compared to INR and its supply is controlled by the Fed.

Must Read: Indian rupee going global? After Russia, 35 countries show interest in INR trade settlement mechanism

If the trade is done in rupees, RBI will not be required to look for buyers for INR to sell dollars in return.

For example, if a buyer in India enters into a transaction with a seller from Spain, he/she first has to convert rupee into dollars to make payment of the purchase.

After receiving those dollars, the seller will have to get the amount converted into euro. Both the parties involved will incur the conversion expenses and also face the risk of foreign exchange rate fluctuations.

India has been reportedly looking to bring countries that are short of dollars into the rupee trade settlement mechanism.

A Vostro account will enable countries to get the invoice of the goods and services made in Indian rupees if the counterparty has a Rupee Vostro account. They will no longer have to pay or receive dollars.

What are Vostro accounts?

Vostro is an inter-bank, inter-country accounts.

For example, a bank in India does not have a branch in other country, say Denmark. So, this bank opens an account in another bank in Denmark, which is already present in the european country. This is called as Authorised Dealer (AD) for which it takes the AD permission from the RBI.

Rupee Vostro accounts keep a foreign entity’s holdings in the Indian bank in INR. When an Indian buyer wants to make transaction in rupees with a foreign trader, the amount will be credited to this Vostro account. When the Indian exporter needs to be paid for goods supplied, this Vostro account will be deducted, and the amount will be credited to the exporter’s account.

Don’t Miss: Russia starts foreign trade settlements in rupee, more countries to join

For example, a bank of Denmark may approach an AD bank in India for the opening of Special Rupee Vostro account. After which, the AD bank will seek approval from RBI with details of the arrangement and post the approval granted by the India’s central bank, the Special Rupee Vostro account in the Indian AD bank by a Denmark bank will get operational.

The trade settlement between the two parties can then start in INR. Also, the exchange rate between the currencies of the two trading nations may be market determined.

Giving greater flexibility to Vostro facility, the Indian central bank last November clarified that the rupee balances lying in the accounts can be hedged so that foreign companies can minimise their losses from foreign exchange fluctuations.

Also, the RBI has given its approval to transfer balance in one special rupee Vostro account to a similar account of another bank from the same country.

Last month, Russia became the first country to begin settlement of foreign trade in rupee, giving up dollar and euro all together.

About 35 nations have expressed interest in better understanding the rupee trade mechanism. They include neighbours such as Bangladesh, Nepal and Myanmar which have been grappling with a shortage of dollar reserves.

As per reports, Tajikistan, Cuba, Luxembourg and Sudan have also been talking to India about using the mechanism.

Also Read: Sri Lanka, Russia to use Indian rupee for international trade, more countries in talks

On Friday, RBI governor Shaktikanta Das said rupee settlement for cross-border trade has huge potential. He added that the central bank has initiated talks with some nations in South Asia to facilitate such trade.

We are already in discussions with some of the countries in this region to facilitate rupee settlement of cross-border trade in the South Asian region. So, that can be another area which has a very big potential in the years to come,” he said.

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