India’s central bank, the Reserve Bank of India (RBI), announced on Tuesday that foreign investors holding Special Rupee Vostro Accounts (SRVAs) can now invest their surplus rupee balances in Indian central government securities.
SRVAs are rupee-denominated accounts held by Indian banks on behalf of foreign banks, facilitating trade settlements in local currency. The RBI first introduced these accounts in 2022 to promote the internationalisation of the Indian rupee.
According to the RBI notification, foreign entities do not need to register as foreign portfolio investors to invest from SRVA balances. However, they can only allocate up to 30% of their balance toward securities with a residual maturity of less than one year, such as treasury bills.
Reuters had reported in May that the RBI was seeking to lift this cap to encourage more rupee-based investments and boost bilateral trade.
So far, 123 correspondent banks from 30 countries have been approved to open 156 SRVAs with 26 Indian banks, as part of efforts to enhance local currency trade, a junior trade minister informed Parliament earlier this year.
What is a Vostro Account?
A Vostro account is a type of bank account that a domestic bank holds on behalf of a foreign bank, in the local currency in this case, the Indian rupee. It is used to settle trade transactions between two countries without using a third currency like the U.S. dollar.
For example, if a company in Russia wants to trade with a company in India, the Russian bank can open a Vostro account in an Indian bank. Payments for trade can be made in rupees using this account, simplifying the process and supporting local currency trade.
What’s New?
Now, the RBI says that the extra rupees sitting in these Vostro accounts can be invested in Indian central government securities. This gives foreign investors a way to earn returns on unused funds without going through the usual foreign portfolio investment route.
However, there is a limit only 30% of the surplus can be used to buy short-term securities like treasury bills.
As of now, the RBI has approved 123 foreign banks from 30 countries to open 156 SRVAs with 26 Indian banks to boost trade in rupees.
