Explained: How India’s vostro accounts will help Sri Lanka tide over its economic crisis

New Delhi, Jan 10: The Indian Bank which has a long presence in Sri Lanka has been given the regulatory go ahead to hold special Rupee vostro accounts of three banks. This would help in tiding over a serious foreign exchange crunch, which Sri Lanka has been facing.

The account is expected to be activated in about a week by the bank that is headquartered in Chennai, Tamil Nadu.

How the vostro account will help Sri Lanka:

A vostro account in local currency will enable Sri Lanka to import from India and this would ensure that the country's Dollar supply will not dwindle. The INR vostro facility is part of the special trade agreement that was finalised by the Reserve Bank of India in July 2022.

This arrangement would allow the Indian importers to deposit Rupees in vostro account that the overseas banks open with banks in India and clearing of dues to Indian exporters from the surplus balances in the vostro accounts, an Economic Times report said.

This account will also help Sri Lanka utilise the Indian Rupee lines extended by India and will also help the island nation stabilise its economy.

In July last year, the RBI opened up Rupee trade and it came at a time when the dollar was appreciating at a high rate. This also came in the wake of sanctions being imposed on Russia. In order to mitigate these issues, the RBI came up with the Rupee trade mechanism.

How does the mechanism work:

This is a mechanism of using the INR instead of Dollars and other currencies for international transactions. Since the US dollar is the globally accepted payment benchmark, trade transactions are done in the US dollar. With the Rupee trade mechanism, the exporter can receive or pay the remittances in Rupees.

If the trade is done in Rupees, then the RBI will not have to look for buyers of the INR to sell Dollars in return. If a buyer in India gets into a transaction with a seller in Spain, he or she will first have to convert the Rupee into Dollars to make the payment for the purchase. After that the seller will have convert the amount into Euro and both parties involved will incur the conversion expenses and face the risk of the foreign exchange rate fluctuations.

The vostro account will enable countries to get the invoice of the goods and services made in Indian Rupees. This would be possible if the other party has a vostro account. This would mean that the counterparty will no longer have to pay in Dollars.

What is a vostro account:

In a nut-shell if one were to put it, a vostro account is an inter-bank or inter-country account. In case a bank in India does not have a branch in another country, then the bank opens an account in another bank in that country. This is called as Authorised Dealer and permission for the same has to be taken by the RBI.

The Rupee vostro accounts keeps a foreign entity's holdings in the Indian bank in INR and when an Indian buyer wants to make a transaction in Rupees with a trader, the amount will be credited to this Vostro account. When the Indian exporter has to be paid for the goods supplied, then the vostro account will be deducted and the amount credited to the exporter's account.

What the RBI said.

RBI Governor, Shaktikanta Das said on Friday last that the Rupee settlement for cross-border trade has a huge potential. He also said that the RBI which is India's central bank has initiated talks with some nations in South Asia to facilitate such trade.

He went on to add, ' we are already in discussions with some of the countries in this region to facilitate rupee settlement of cross-border trade in the South Asian region. So, that can be another area which has a very big potential in the years to come.'