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UPSC Special: What are Vostro accounts, 9 of which have been opened with 2 Indian banks? (And what is a Nostro account?)

A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency, i.e., rupee. The idea is to get around Western sanctions against Russia by carrying on trade in rupees.

On July 11, the RBI put in place a mechanism to settle international trade in rupees. (Source: Pixabay)

On Tuesday (November 15), the government announced that nine special Vostro accounts have been opened with two Indian banks after permission from the RBI to facilitate trade in rupee in the wake of sanctions on Russia by the US and European countries.

What is a Vostro account?

A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency — which, in the case of India, is the rupee. The RBI allowed nine such accounts, including IndusInd Bank and Uco Bank.

In the case of trade with Russia, payments in rupee for the export and import of goods will go to these Vostro accounts. The owners and beneficiaries of this money will be the exporters and importers in both the countries. The banks will keep the record of money transferred.

And what is a Nostro account?

Two kinds of accounts, Vostro and Nostro, are often mentioned together. Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where.

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So, if an Indian bank like the SBI wants to open an account in the United States, it will get in touch with a bank in the US, which will open a Nostro account and accept payments for SBI in dollars.

The account opened by the Indian bank in the US will be a Nostro account for the Indian bank, while for the US bank, the account will be considered a Vostro account.

Literally, Nostro means ‘ours’ and Vostro means ‘yours’ in Latin. Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts.

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What led to creation of the Vostro accounts?

On July 11, the RBI put in place a mechanism to settle international trade in rupees “in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the rupee”.

The central bank’s move has come in the wake of increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU.

According to the central bank, AD (authorised dealer) banks in India have been permitted to open rupee Vostro accounts. Accordingly, for settlement of trade transactions with any country, an AD bank in India may open special rupee Vostro accounts of correspondent banks of the partner trading country.

First published on: 16-11-2022 at 13:24 IST
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