News Highlight
It has been around three months since the Reserve Bank of India (RBI) implemented a mechanism to settle international trade in the rupee.
Key Takeaway
- Only two Indian banks – Uco Bank and Yes Bank – have opened special Vostro accounts to settle international trade in rupees.
- Other Indian banks, including State Bank of India (SBI), the largest in the country, are yet to initiate the process.
The Initiatives India has taken for International Trade
- Rupee Rouble Agreement:
- The Rupee-Rouble trade arrangement is an alternative payment mechanism to settle dues in Rupees instead of Dollars or Euros.
- Currency Swap Facility:
- The word swap means exchange. A currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
- These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
- Free Trade Agreements (FTA):
- FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
- Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
The Benefits of International Trade in the Rupee.
- Forex Fluctuation:
- The move would reduce the risk of forex fluctuation, especially looking at the Dollar-Rupee parity.
- Forex reserve:
- International trade in the Rupee would reduce the drain of the forex reserve of India.
- Arrest Fall of Rupee:
- Amid ongoing rupee weakness, this mechanism aims at reducing demand for foreign exchange, by promoting rupee settlement of trade flows.
- Promote Growth:
- It will promote the growth of global trade and will support the increasing interest of the global trading community in the Indian rupee.
- Appreciate the value:
- International trade in the Rupee would increase the demand for the Indian rupee, which in turn appreciate the value of the Indian rupee.
- Trade with Sanctioned Countries:
- The mechanism is meant to facilitate trade with countries under economic sanction.
Vostro account
- Origin:
- The Italian word ‘Vostro’ means ‘yours’. Hence, Vostro account points at – “Your account with us“.
- Purpose:
- Vostro accounts are generally held by a foreign bank in our country (with a domestic bank).
- It is generally maintained in Indian Rupees (if we consider India).
- It enables a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank to execute wire transfers, withdrawals and deposits for customers.
- Nostro accounts:
- From the perspective of domestic banks, the funds deposited at correspondent banks are referred as nostro accounts.
- Nostro accounts are denominated in the foreign currency of the correspondent bank.
Content Source: The Hindu