As of now, the RBI has given approval for the opening of 12 Vostro Accounts for carrying out trade in Indian Rupees. How is this trade facilitated? "The medium of exchange is facilitated by a Vostro Account that is an account maintained by a domestic bank that keeps a foreign entity’s holdings in domestic currency i.e. Mauritius and Sri Lanka have also shown interest, and have seen their special vostro accounts approved by the RBI, documents showed. Opening of these accounts needs approval from the Reserve Bank of India. The four countries have shown interest in opening special rupee accounts, called vostro accounts, but partner banks in India have not yet provided those facilities, documents showed. A reliance on the Indian Rupee, away from the US Dollar could mean crucial respite for these countries, said Verma. Over the years, but especially in the last few months, a strengthening Dollar has made imports expensive for most countries around the world, creating an obvious need for an alternative. The increasing participation of these countries strengthens the hold of rupee as a currency in the international Forex market," said - Nikhil Varma, Managing Partner, MVAC. "The recent gravitation of more countries, including the likes of Tajikistan, Cuba, Luxembourg and Sudan towards the Indian rupee settlement mechanism has been very encouraging. The government is reportedly looking to bring countries that are short of dollars into the mechanism.
It has already been used by Russia following the imposition of sanctions on Moscow over the Ukraine war.
Tajikistan, Cuba, Luxembourg and Sudan keen on rupee trade settlement Tajikistan, Cuba, Luxembourg and Sudan have begun talking to India about using the mechanism, reported Reuters, quoting two sources and an official document. For a currency to be accepted globally, capital flows and trade have to be liberalized too. Even though rupee invoicing for international transactions was allowed earlier, surplus rupee were not allowed to be channeled back into Rupee assets. With the help of a Vostro account now, instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account. Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations. The seller will receive those dollars, which is then converted into euro. For example, if an Indian buyer enters into a transaction with a seller from Germany, the Indian buyer has to first convert his rupees into US dollars. Since the US Dollar is the world’s reserve currency, most of these transactions are settled in dollars. When countries import and export goods and services, they have to make payments in a foreign currency.
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