International Trade in Rupee

2023 MAY 6

Preliminary > Economic Development > Indian Economy and Issues > External sector

Why in news?

India and Russia have halted efforts to settle bilateral trade in rupees after months of negotiations failed to convince Russia to keep rupees in its coffers.

Why have India-Russia talks to settle trade in rupees halted?

India and Russia have been engaged in talks for a rupee trade settlement mechanism for over a year.
However, reports suggested that months of negotiations had ultimately failed to convince Russia to keep rupees in its chests.
This is because, with a high trade gap in favour of Russia, it believes it will end up with an annual rupee surplus of over USD 40 billion if such a mechanism is worked out and feels rupee accumulation is ‘not desirable’.
The rupee is also not fully convertible and India’s share of global exports of goods is just about 2%. These factors reduce the necessity for other countries to hold rupees.

About International Trade in Rupee:

In the existing mechanism, if an Indian national exports or imports, transactions are carried out in a foreign currency, which is usually the US Dollar.
In 2022, RBI brought a new system for settling payments all exports and imports in Indian rupees.

How it works?

Authorised Dealer Banks in India had been permitted to open a special Rupee Vostro Accounts.
Indians undertaking imports through this system shall make payment in rupee into the Vostro account of the partner country, against the invoices for the supply of goods or services from the overseas seller.
Indian exporters shall be paid the export proceeds in rupee from the balances in the special Vostro account of the partner country.
However, authorised banks will need prior permission from the Foreign Exchange Department of RBI before putting the mechanism to use.
The exchange rate between the currencies of the two trading partner countries will be decided by the market.
Balance in Special Vostro Accounts may be used for permissible capital and current account transactions like payments for projects and investment in treasury bills & government securities.

What is Nostro account and Vostro account?

"Nostro" and "vostro" are two different terms used to describe the same bank account.
The terms are used when one bank has another bank's money on deposit, typically in relation to international trading or other financial transactions.
Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank. The terms nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank.

Nostro account

Vostro account

A Nostro account is a reference used by Bank A to refer to "our" account held by Bank B.
Nostro is a shorthand way of talking about "our money that is on deposit at your bank."
The Nostro account is the record of the bank that has money on deposit at another bank.
These accounts are often used to simplify settlements of trade and foreign exchange transactions. They are denominated in foreign currencies.

Vostro is the term used by Bank B, where bank A's money is on deposit.
Vostro is a reference to "yours" and refers to "your money that is on deposit at our bank."
A vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual.

PRACTICE QUESTION:

In the context of foreign exchange transactions, consider the following statements:

1. Nostro accounts are denominated in foreign currencies

2. Vostro accounts enable domestic banks to provide international banking services to their clients who have global banking needs.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

Answer

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