India has increased its purchases of cheaper Russian petroleum despite resistance and penalties from other countries. In order to complete this transaction and complete its purchase, New Delhi seeks to settle in rupees.
Prior to making the proposed rupee Vostro accounts operational to settle international trade, including that with Russia, the banks contacted the Reserve Bank of India (RBI) to clarify any legal or regulatory ambiguities.
Before implementing the proposed rupee Vostro accounts to settle international trade, including that with Russia, banks have contacted the Reserve Bank of India (RBI) to clarify any legal or regulatory ambiguities.
The key issue is how accrued rupee sums in these accounts can be repatriated without incurring fines in the event that the banks are from nations subject to international sanctions, like Russia.
Vostro accounts
It’s a type of account used for correspondent banking. Here, a foreign bank serves as an agent for a domestic bank, offering financial services on its behalf. The account enables domestic banks to offer their customers that have global needs international financial services.
The holdings of a foreign entity in the Indian bank are kept in this account in Indian rupees. Thus, the money is credited to the Vostro account when an Indian importer wishes to pay a foreign trader in rupees.
The topic of Vostro accounts came up during a meeting last week on the RBI’s planned system for rupee-based foreign trade settlement.
People with knowledge of the matter told ET that banks have also asked for clarification on the transfer of government securities bought with the surplus in these accounts.
The additional issues include problems with billing in rupees, the conversion rate for volatile currencies, financial messaging relating to banking, and contacts with the correspondent bank. As their custodians, banks hold Vostro accounts on behalf of other banks.
India has increased its purchases of cheaper Russian petroleum despite resistance and penalties from other countries. In order to continue making purchases, New Delhi seeks to settle this trade in rupees.
An authorized bank in India may open special rupee Vostro accounts of correspondent banks of any trading partner countries, under a recently announced agreement by the RBI.
Indian purchases of cheaper Russian crude have increased despite international criticism. If this transaction is settled in rupees, New Delhi may be able to keep making these purchases.
Senior representatives from the finance ministry, the external affairs ministry, and the RBI were present at the meeting.
According to the agreement made public by the RBI on July 11, a bank in India with authorization may open special rupee Vostro accounts of correspondent banks of any trading partner nation.
Banks from both the public and private sectors are currently hesitant to open these Vostro accounts because they are concerned about being struck by US sanctions against Russia.
Because they were concerned about being harmed by the sanctions imposed on Russia by the US, banks in both the public and commercial sectors have been hesitant to open and run these Vostro accounts.
A bank executive stated, “We expect RBI to provide some clarity so that there is a regulatory comfort before we apply this approach. Inquiries were not answered by the RBI.
Another banker claimed that the RBI announcement is silent regarding the method of repatriation, and lenders believe that this leaves them open to attack from the US.
Numerous Russian banks have been excluded from SWIFT, the international mechanism for cross-border money transfers, since the Russian invasion of Ukraine. Russian banks advised Indian banks to think about utilizing the Russian SPFS system, which serves as a substitute for SWIFT.
Indian banks, meanwhile, have been hesitant out of concern for US penalties.
Following its invasion of Ukraine, many Russian banks were excluded from SWIFT, the international mechanism for transmitting money across borders. Indian banks were advised to think about joining the Russian SPFS system, a messaging and settlement system comparable to SWIFT, by Russian banks.
Indian banks have been hesitant since doing so would result in US sanctions. The majority of Indian banks maintain sizable portfolios denominated in foreign currencies, and any restriction could have a negative impact on them.
Banks are worried about how the rupee amounts that have accrued in these accounts will be returned without incurring fines, in the event that the banks are from nations that have sanctions, like Russia.
The majority of Indian banks currently have sizable portfolios denominated in foreign currencies and cannot afford any restrictions.
Any surplus in these rupee Vostro accounts may, under the rules, be put toward buying treasury bills and other government assets. On how the money will be returned, there is still some uncertainty. Banks want clarification on how government securities such as Treasury Bills will be delivered to the purchasers.
Additionally, rupee invoicing and the fluctuating currency exchange rate are concerns for banks.
