The first country to open a special Rupee Vostro account is Russia, which has increased the supply of discounted crude to India post the Ukraine war. Indian exporters using the rupee trade mechanism will be paid the export proceeds in INR from the balances in the designated Vostro account of the correspondent bank of the partner country. A Rupee Vostro account is a rupee account held by a foreign bank with a bank in India. The new steps allow Indian traders to use special Vostro accounts for settling their rupee-denominated trade invoices. In 2022, surging oil prices and a falling rupee turned out to be a dire combination for the country’s inflation situation, given that it imports most of its oil. A drop in India’s currency not only increases the bill for importers of the country, but also adds more burden to the domestic prices in the form of imported inflation.
The RBI’s moves came amid the Indian currency hitting a record low practically every day against the dollar in the wake of Russia’s invasion of Ukraine. Internationalisation of the rupee can lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk.
1 Trade would largely follow this pattern. IMF data of Q3 2022 on global holdings of forex reserves suggest that 55 per cent is held in dollars, followed by 18.25 per cent in euro, and about 5 per cent each in yen and pound among others. The dollar has been the world’s principal reserve currency and is most widely used for international trade. One of the driving forces behind this move is probably the Western sanctions on Russia due to its war in Ukraine, which led to the West shutting Russia off from the Society of Worldwide Interbank Financial Telecommunication, commonly known as SWIFT, payments system. Given the government’s push towards the internationalisation of the rupee, in July 2022 RBI set up India’s rupee trade settlement mechanism to attract interest from more countries. The Reserve Bank of India (RBI) has been trying to cut down the use of the US dollar to keep the rupee (INR) stable and has taken an initiative that will allow invoicing of international trade in Indian rupees instead of dollars and other major currencies.
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