Vostro accounts are a way for domestic banks to meet the banking needs of their international customers using local currency. Union Minister of State for External Affairs Rajkumar Ranjan Singh clarified this in the Lok Sabha. A list of countries that have set up separate Vostro accounts in India has been released. The list includes Fiji, Germany, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Singapore, Sri Lanka, Tanzania, Uganda, Bangladesh, Maldives, Kazakhstan and UK.
Vostro account?
A vostro account is a facility where a domestic bank can open an account for a foreign entity in the domestic bank’s currency. If in India, through this account transactions can be done in Rs. RBI had earlier given permission to nine banks including IndusInd Bank and UCO Bank to open Vostro account. Vostro accounts were initially allowed to facilitate trade with Russia.
Traders will benefit
The government has engaged in discussions with the Indian business community, including small and medium enterprises, to ease the process of implementing this system.
The RBI had earlier introduced a mechanism to facilitate payment settlements for international trade in rupees with emphasis on India’s exports. RBI has allowed invoicing and cash transactions in Indian rupees for international trade transactions from July 11, 2022. After this more countries open vostro account.
Earlier, when various countries imported and exported goods etc., they could not pay in local currency.
Transactions are denominated in dollars as the US dollar is the world’s leading reserve currency.
For example, suppose an Indian buyer transacts with a seller in Germany. Indian should convert Rupees to US Dollars. Pay the seller the amount in dollars. Later it will be converted to Euro. Here, both parties involved in the transaction have to pay a charge for currency exchange and face fluctuations in foreign exchange rates. Meanwhile, foreign payers can pay in Rs. The amount will be credited to Vostro account. The invoice will also be in Indian Rupees.
