From UPSC perspective, the following things are important :
Prelims level: Vostro and Nostro Accounts, SWIFT
Mains level: Trade settlement in Rupees
India and Malaysia have agreed to settle their trade in Indian rupees instead of the US dollar.
What is the move?
- The Reserve Bank of India (RBI) had allowed the settlement of international trade in the Indian rupee in July 2022.
- Malaysia was one of the eighteen countries that were permitted to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.
Volume of bilateral trade
- India-Malaysia bilateral trade reached $19.4 billion during 2021-22.
- Malaysia is the third-largest trading partner of India in the ASEAN region, after Singapore and Indonesia, with $30.1 billion and $26.1 billion in bilateral trade with India.
Facts for prelims: Nostro and Vostro AccountsNostro and vostro accounts are two types of accounts used in international trade and banking to facilitate foreign currency transactions. A Nostro account is a foreign currency account held by a domestic bank in a foreign bank. It is used to facilitate international transactions, such as foreign currency payments, and to hold foreign currency deposits. The word “nostro” means “ours” in Italian, and the term reflects the fact that the foreign bank holds the domestic bank’s funds on its behalf. A Vostro account, on the other hand, is a domestic currency account held by a foreign bank in a domestic bank. It is used by the foreign bank to hold domestic currency deposits, and to facilitate domestic currency transactions such as payments to local vendors. The word “vostro” means “yours” in Italian, and the term reflects the fact that the domestic bank holds the foreign bank’s funds on its behalf. |
What are Special Rupee Vostro Accounts (SRVAs)?
- SRVAs are a mechanism introduced by the RBI to allow banks from certain countries to open accounts in Indian rupees with Indian banks.
- These accounts can be used to settle trade transactions between the two countries in Indian rupees, instead of using other currencies.
- The aim of this initiative is to facilitate the growth of global trade and to support the interests of the global trading community in Indian rupees.
- The Union Bank of India has become the first bank in India to operationalize this option by opening a SRVA through its corresponding bank in Malaysia – India International Bank of Malaysia.
- Banks from 18 countries so far are allowed by the RBI to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.
Significance of the move
- The move aims to provide better pricing for goods and services traded between the two countries and overcome currency-related obstacles that have affected bilateral trade.
- This shift away from the US dollar signals India’s de-dollarization efforts.
- The decision also comes against the backdrop of ongoing official efforts to safeguard Indian trade from the impact of the Ukraine crisis.
Broader implications
- The sanction on the Russian economy and the ongoing war in Ukraine have made it increasingly difficult to make payments to Russia in US dollars.
- Many countries are exploring alternatives to the US dollar as the dominant reserve currency for international trade.
Try this MCQ
Q. Which of the following is a key difference between Nostro and Vostro accounts?
A) A Nostro account is held by a bank in a foreign country, while a Vostro account is held by a bank in the home country.
B) A Vostro account is used for incoming transactions, while a Nostro account is used for outgoing transactions.
C) A Nostro account is denominated in the local currency of the home country, while a Vostro account is denominated in a foreign currency.
D) A Vostro account is used for trade financing, while a Nostro account is used for personal banking transactions.
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A
c
A
B