18 Nov Nostro and Vostro Account
Nostro and Vostro Account
Relevance for Prelims: Nostro Vostro Account, Balance of payments
Relevance for Mains: Significance of Nostro and Vostro Account, Impact of Global sanctions on economy of India.
Context: Reserve bank of India allowed opening of 9 Vostro accounts in two India banks for settlement in rupee for trade between India and Russia.
About:
- Nostro Account is an account held by bank in foreign currency in another bank. It allows customers to deposit money in the bank’s account in another bank.
- Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange and trade transactions. The opposite term “vostro accounts,” derived from the Latin word for “yours,” is how a bank refers to the accounts that other banks have on its books in its home currency.
How a Nostro Account Works and example
- Both accounts actually refer to the same entity but from a different perspectives.
- For example, Bank X has an account with Bank Y in Bank Y’s home currency. To Bank X, that is a Nostro, meaning “our account on your books,” while to Bank Y, it is a Vostro, meaning “your account on our books.” These accounts are used to facilitate international transaction and to settle transactions that hedge exchange risk.
Pic: Vostro Account
Need of Nostro and Vostro:
In existing mechanism, when India imports goods and services from any other country (excluding Bhutan/Nepal), in case of imports, India company must pay in dollars, Euro, yen etc. In case of exports, Indian companies get money in dollars, euro etc.
Benefits associated with Nostro and Vostro:
- Trade with sanctioned countries: Countries can trade with ease despite sanctions imposed by U.S, U.K or United Nation.
- Stability in Domestic Currency: This helps bring stability in the rupee which in future could also ensure parity with global currencies.
- Apply break on depreciation: Since India imports 85% of crude oil of its domestic needs, 55-60% of edible/vegetable oil of its domestic needs, the excessive outflow of dollars leads to a decline in forex reserves and depreciates the rupee against the dollar.
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Plutus IAS current affairs 18thNovember 2022
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