Vostro accounts are accounts a bank holds on behalf of another, often foreign bank, and this forms a key part of correspondent banking.’
In July 2022, the Reserve Bank of India introduced a new mechanism for international trade settlements in rupees, aiming to promote exports and facilitate imports.
Rupee Vostro Accounts keep a foreign entity’s holdings in the Indian bank, in Indian rupees. 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.
“The banks are acting in a fiduciary relationship and they share a principal-agent relationship. The correspondent foreign bank is a financial intermediary in the transactions that they are involved in. The foreign bank acts as an agent that provides services such as executing wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, expediting international trade on behalf of the domestic bank. It is most used in settlement of foreign exchanges or foreign trade. No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India. An overdraft facility can only be availed if it is specifically sanctioned,” explained tax experts at Clear.
“In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR,” the RBI had said in a statement.