“Some vostro accounts have opened up but the rupee trade has not picked up significantly – there is limited traction there so far. Participants are increasingly choosing to use third countries to route payments which are not in INR, roubles or dollars,” said one of them. “The transactions, of which a large part is for oil trades, are being routed through friendly countries.”
The push is toward facilitating trade through the UAE as the country’s currency – the dirham – is pegged to the dollar and enjoys global stability. “There is not that much interest at present in the rupee transactions,” said one of the persons cited. “While the interest is picking up slowly, there are complex invoicing arrangements to be carried out as the existing systems are heavily dominated by the euro and the US dollar. Hence, the push for routing it through third countries.”
On July 11, 2022, the Reserve Bank of India (RBI) had announced additional arrangements for trade invoicing, payment and settlement in rupees. The broad framework includes the provision for all exports and imports under the arrangement to be denominated and invoiced in the Indian currency. Settlements of transactions would also take place in rupees, the central bank said.
The RBI’s steps were to support the strengthening interest of the global trading community in rupee transactions.
Vostro Accounts
The measures were announced at a time when the rupee was witnessing enhanced volatility due to aggressive interest rate hikes in the US and risk aversion in the wake of the Ukraine war. Moreover, with US sanctions on Russia hampering trade, efforts were made in several countries to move away from the dominance of the dollar in global trade.
According to the RBI’s notifications, domestic importers undertaking imports through the rupee settlement mechanism must make payments in the Indian currency, which would be credited into special vostro accounts of correspondent banks of partner countries against invoices for the supply of goods and services from foreign suppliers.
A vostro account is held at a bank on behalf of another lender that’s typically located in a foreign country. With India opting to purchase discounted oil from Moscow, Russia is now the single-largest supplier of crude to the country, having toppled Iraq from the position.
Earlier this month, Alexey Valkov, director of the St Petersburg International Economic Forum (SPIEF), told ET that trade between India and Russia hit a record $39.8 billion in FY23. India-Russia trade in calendar 2022 is estimated to have trebled from the previous calendar year.
Products that India is increasingly supplying to Russia include medicines, automobile parts, textiles and food products, Valkov said.
An email sent to the RBI did not receive a response at the time of going to press.
Addressing the media after the RBI’s monetary policy review last week, deputy governor T Rabi Sankar said that while interest in rupee trade is increasing, volumes were not picking up due to teething issues.
“The stakeholders on either side are getting adjusted to it,” RBI governor Shaktikanta Das said on the matter. “It’s completely a new paradigm for stakeholders – for importers and exporters from both sides, for banks on both sides. Both sides meaning, India and whichever is the country at the other end. They are getting used to it. It is something which we expect will improve steadily.”
Last month, a government official said that several banks, including HDFC Bank and UCO Bank, had opened as many as 30 special vostro accounts to facilitate overseas trade in the rupee. According to director general of foreign trade (DGFT) Santosh Kumar Sarangi, 18 countries have opened special vostro accounts with Indian banks.
Banking industry sources said that Kolkata-based UCO Bank, which has an account with Russia-based Gazprom, had so far carried out rupee-denominated trades worth ₹14-15 crore. The trades were primarily in permitted goods which are not on sanctions lists such as engineering goods, the sources said.