International Transactions Settlement Mechanism:

[1] Vostro Accounts:

• Named from the Latin word “vostro,” meaning “yours.”
• Represents a domestic bank’s account held by a foreign bank in the local currency (e.g., INR in India).
• Allows foreign banks to manage local currency transactions on behalf of their clients.
• For example, a foreign bank holding an account in an Indian bank in Indian Rupees (INR) for facilitating transactions within India.

[2] Nostro Accounts:

• Derived from the Latin word “nostro,” meaning “ours.”
• Refers to a foreign bank’s account held by a domestic bank in the foreign currency (e.g., USD in the United States).
• Enables domestic banks to handle foreign currency transactions for their clients.
• For instance, an Indian bank holding an account in a U.S. bank in U.S. Dollars (USD) to facilitate international transactions in the U.S. currency.

[3] Loro Accounts:

• From the Italian word “loro,” meaning “their.”
• Represents an account held by one foreign bank in another foreign bank’s currency.
• Facilitates interbank transactions between two foreign banks without converting currencies into a domestic currency.
• For example, if a bank in India holds an account in a bank in the United States in USD (U.S. Dollars) to facilitate transactions between those two banks.

• Complements existing currency systems, allowing INR-based settlements.
• Reduces reliance on foreign currencies, mitigating economic shocks.
• Aims to elevate INR’s global status and facilitates trade with sanctioned countries.

• All exports and imports invoiced in INR.
• Exchange Rate is Market-determined.
• Final trade settlements takes place in INR.

• Indian banks open SRVA accounts for foreign banks.
• INR used for import payments and export receipts.

• Enables advance payments for Indian exporters, complying with Foreign Exchange Management Act (FEMA), 1999.
• Correspondent bank should not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions

• Reduces demand for foreign currencies, increasing INR use in trade.
• Mitigates economic shocks by minimizing reliance on foreign exchange.
• Aims to boost INR’s global acceptance and facilitates trade with sanctioned nations.

PYQ:

[2015] Convertibility of rupee implies:

(a) being able to convert rupee notes into gold

(b) allowing the value of rupee to be fixed by market forces

(c) freely permitting the conversion of rupee to other currencies and vice versa

(d) developing an international market for currencies in India