Context: Russia has managed to use up most of its rupee balance (more than $8 billion) that had piled up in special vostro accounts of Indian banks.
What are Vostro Accounts?
- Vostro accounts are accounts a bank holds on behalf of another foreign bank.
- A Rupee Vostro account is used to facilitate international trade transactions in Indian rupee. Rupee Vostro accounts keep a foreign entity's holdings in the Indian bank, in Indian rupees.
How do Transactions Take Place?
- 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.
- Even though rupee invoicing for international transactions was allowed earlier, countries with whom we run trade deficits were reluctant to use this rupee settlement because the vostro accounts are left with surplus amounts.
- To overcome this, the RBI released a notification allowing international trade settlement in India rupees. It allowed surplus rupee held in vostro accounts to invest in rupee assets like Government securities.
