The Significance of Special Rupee Vostro Accounts in East Asia

Meenakshi V

In 2022, the Indian Rupee fell 10 percent against the US dollar, making it the worst-performing Asian currency. The fall was due to concerns over inflation, recession, and the war in Ukraine. To address this challenge, the Reserve Bank of India (RBI) proposed a new mechanism for international trade settlement called the Special Rupee Vostro Account (SRVA), which allows for payment in the Indian rupee for exports and imports under the Foreign Exchange Management Act of 1999 (FEMA). The mechanism came as a relief for the Indian Rupee and the depleting foreign exchange reserves by encouraging payment for imports using local currencies rather than USD.

The concept of SVRA comes under the broader framework of the Correspondent Banking System. Correspondent Banking is performed by select banks that provide exclusive transactional services and act as agents to the principal and the receiving banks. Services include wiring transactions, providing treasury and relationship management services, trade financing, maintaining Vostro and Nostro accounts, etc. The SVRA also allows the investment of surplus balance in Indian government securities. Furthermore, the SVRA enables them to use a correspondent bank to save on operating costs and overhead charges. Both banks will have arrangements with the Society for Worldwide Interbank Financial Telecommunication (SWIFT). 

The RBI has approved Vostro accounts for 18 countries and has established SVRA with three countries in the East Asian region, namely Myanmar, Singapore and Malaysia. The economic policies position India is in a relatively advantageous position to negotiate deals with other countries in the South-East and East Asian regions, as it can showcase its operational viability and functionality through its existing portfolio and records. However, the RBI needs to exercise caution in deploying this plan, as it could potentially harm India's economy and damage the trust and confidence of its investors if not handled carefully.

A Special Rupee Vostro account provides an alternate method of settling international trade in Indian Rupees instead of using either USD or any other reserve currencies of the world (Yen, Euro, Yuan, and the British Pound). 

Simplifying International Trade without USD

Malaysia

According to data from the Ministry of Commerce and Industry, Malaysia’s bilateral trade has reached USD 19.89 billion in 2022-23. Malaysia’s economic stability and growth are based on a diversified export portfolio of manufactured goods, palm oil, and agricultural products. India is Malaysia’s largest trading partner in the ASEAN region, while Malaysia is India’s third-largest trading partner. There are several possible reasons why Malaysia may be interested in joining India’s alternative scheme for international settlement, including catering to the Indian diaspora, safeguarding its dollar reserves after the pandemic, and hedging against the weakening of the Chinese yuan. On 01 April 2023, the India International Bank Berhad IIBM, a joint venture between three of India’s prominent government-owned financial institutions, had its Vostro account operationalized by the Union Bank of India.

Myanmar 

Myanmar and India’s bilateral trade is a meagre USD 1.76 billion in 2022-2023. However, India’s Engineering Export Promotion Council announced an SVRA banking system with Myanmar to promote trade. RBI has appointed the Punjab National Bank to take charge and set up a corresponding bank in India with its counterpart in Myanmar. The SVRA would encourage importing goods such as timber and pulses from Myanmar and exporting pharmaceuticals and manufactured commodities from India. Myanmar’s foreign reserves of USD have also almost depleted, and its plans to use currencies such as the Rupee, Baht & Renminbi would lessen its dependence on USD. 

Singapore

Singapore has invested USD 136.653 billion in India over the last 20 years, making it New Delhi’s most significant foreign direct investor. The two countries have a bilateral trade of USD 30.11 billion, with Singapore being India’s sixth-largest trading partner. The Indian government has plans to open SVRA accounts in Singapore as part of a partnership, but its implementation is pending. However, SVRA’s idea of investing the surplus balance in Indian government securities could further encourage Singapore to invest more in India.

Advantages and Complications of Using SRVA

The SRVA mechanism has a considerable number of benefits, such as reducing exchange rate conversion charges, eliminating the need to conduct transactions in freely convertible currencies, providing opportunities for the Indian Rupee to play a crucial role in international trade, easing current-account outflows by reducing transaction costs, and lowering currency hedging. Economists estimate that implementing this mechanism could save around 36 billion dollars annually in hard currency for international trade. By strategically locking in India's trade deficit with its key trading partners and enabling it to enter the Indian Bond and securities market with greater ease, this mechanism can also lessen pressure on the Indian Rupee as the dollar continues to strengthen against it with the Fed's hike in target interest rate by 75 basis points as on 23 September 2023. 

However, India faces challenges in making the SRVA account function effectively and achieving true internationalization of its currency beyond an alternative. To overcome these challenges, India must strengthen its economic fundamentals, focus on strategic partnerships, and continue its multilateral approach to creating and maintaining efficient trade ties. India needs to be cautious in nudging the Rupee towards full convertibility as this could make the economy vulnerable to external shocks. It is crucial to balance the benefits of free convertibility with the risks involved in allowing investors, residents, and companies to convert their assets to other major reserve currencies and take them out of the country.

Conclusion

The Reserve Bank of India has clarified that the trade easing policy is not directed towards any particular country. Instead, the purpose has been to minimize exchange rate fluctuations and risks for importers and exporters. The policy is being implemented sequentially and calibrated to encourage using the Rupee in trade transactions. Although the RBI denies targeting any specific country, it strategically positioned the policy as an alternative to combat dollar dependency and to establish itself as a key player in global politics. Given the current geopolitical environment, this move was well-timed and appealed to countries facing economic sanctions or a crisis or just wanted an alternative to the normative and diversify the risks posed by unilateral control of the US dollar. In business terms, this strategy is known as "market penetration."

About the Author

Meenakshi V is a Junior Research Affiliate at the Centre for East Asian Studies (CEAS) at Christ University, Bangalore. She is particularly interested in studying de-dollarization and the increasing stature of the rupee as a currency.

Perspective  #09, 31 July 2023 | Centre for East Asian Studies