Nostro and Vostro accounts

Also called: Nostro account, Vostro account, Special Rupee Vostro Account, SRVA · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT

Meaning

A nostro account ("ours") is an Indian bank's account with a bank abroad, kept in foreign currency. A vostro account ("yours") is a foreign bank's account with an Indian bank, kept in rupees. They are the same kind of account, seen from two sides: it is "nostro" for the bank that owns it and "vostro" for the bank that keeps it.

These accounts are how money actually moves between countries in trade. Nostro accounts carry India's payments in foreign currency, mostly dollars. Vostro accounts, especially the Special Rupee Vostro Account (SRVA), let trade be settled in rupees, so India needs fewer dollars.

Explanation

How the two accounts work

• Nostro (our money, kept with you)
• Example: SBI keeps a dollar account with a bank in New York.
• An Indian importer buys goods priced in dollars. SBI pays the foreign seller from its dollar nostro account.

• India has to earn or hold dollars to keep this account funded.

• Vostro (your money, kept with us)

• Example: a Russian bank keeps a rupee account with an Indian bank.

• The Indian importer pays rupees into this account. No dollar is needed.

• One account, two names

• Suppose a Russian bank holds a rupee account with an Indian bank.
• The Russian bank calls it its nostro account.
• The Indian bank calls it a vostro account.
• In Indian news, "vostro" always means a foreign bank's rupee account in India.

The Special Rupee Vostro Account (SRVA)

• What it is: a special rupee account that a partner-country bank opens with an Indian Authorised Dealer (AD) bank. An AD bank is a bank licensed by the RBI to deal in foreign exchange. The SRVA is used to settle trade in rupees.
• It comes from the RBI's July 2022 framework for invoicing (billing), paying for and settling exports and imports in INR [3].
• Step by step (an Indian import):
• The Indian importer pays rupees into the foreign bank's SRVA in India.
• The foreign bank pays its own exporter in local currency.
• For an Indian export, money flows the other way and is paid out of the SRVA balance.

• No dollar is used at any step.

• Key features [1]:

• The rupee exchange rate is market-determined. The market sets it, not the RBI.
• The account holder can hedge rupee exposure, which means taking cover against a fall or rise in the rupee.
• The balance, and any income earned from investing it, is freely repatriable. It can be taken out of India.
• An SRVA can be funded by trade receipts, inward remittances (money sent into India) or transfers from other repatriable rupee accounts.
• Persons Resident Outside India (PROIs) can use SRVA balances to settle genuine deals with other non-residents.

Why vostro balances pile up: the surplus problem

• The link to the trade gap:
• India imports more from some partners than it sells to them.
• The partner earns more rupees than it can spend on Indian goods.

• The unused rupees stay stuck in its vostro account.

• Worked example:

• India buys ₹10,000 crore of oil from Country X and sells X only ₹2,000 crore of goods.
• ₹8,000 crore stays in X's SRVA (₹10,000 − ₹2,000).

• If X cannot invest these rupees in Indian bonds or use them to pay other countries, it will ask to be paid in dollars next time.

• What makes vostro use grow:

• More ways to invest the balances (G-Secs, T-Bills, corporate debt).
• Higher Indian exports to partner countries.

• Freedom to use rupees in deals between third countries.

• What makes it shrink:

• A large one-sided trade deficit.
• India's partial capital account convertibility: foreigners cannot freely convert rupees for investment, so the rupee is less attractive to hold.

In India

• Institution: the RBI sets the rules, and AD banks open and run SRVAs.
• Legal basis: A.P. (DIR Series) Circular No. 10, dated 11 July 2022, "International Trade Settlement in Indian Rupees (INR)" [3]. The Government also changed the Foreign Trade Policy to allow rupee settlement [1].
• Investment window: SRVA balances can be invested in government securities (G-Secs) and Treasury Bills without an FPI (Foreign Portfolio Investor) licence [1].
• Later easing:
• 5 August 2025: the RBI removed the need for prior RBI approval. AD banks can now open SRVAs on their own [2].

• Surplus SRVA balances may now also be invested in corporate debt. The RBI decided this in consultation with the Government [4].

• Russia case:

• India's oil imports from Russia jumped after 2022.
• India sells Russia far less, so Russian exporters' rupees stayed stuck in vostro accounts.

• The policy answer was to let SRVA surpluses be invested in G-Secs, T-Bills and corporate debt [1][4].

• Bigger plan: the RBI Inter-Departmental Group (IDG) report (5 July 2023), chaired by Radha Shyam Ratho, calls for a standard framework for rupee trade deals and rupee accounts for non-residents, both in India and abroad, in the short term (0–1 year) [5].

Don't confuse with

• Nostro vs Vostro: the difference is who owns the account and in which currency. Nostro = an Indian bank's foreign-currency account abroad. Vostro = a foreign bank's rupee account in India.
• SRVA vs ordinary Rupee Vostro Account: SRVA balances can be invested in G-Secs and T-Bills without FPI registration [1]. An existing ordinary vostro account cannot be converted into an SRVA [1].
• Local currency settlement (LCS): LCS settles trade in both partners' own currencies (for example, rupee and dirham with the UAE). SRVA-based settlement is one-sided rupee settlement through a vostro account in India.
• SWIFT: SWIFT is only the messaging network that carries payment instructions between banks. It holds no money. Nostro and vostro accounts are where the money actually sits.

Prelims Hooks

• Vostro = a foreign bank's rupee account with an Indian bank. Nostro = an Indian bank's foreign-currency account abroad. An SRVA is a type of vostro account, not a nostro account.
• The RBI framework for invoicing and settling trade in INR is A.P. (DIR Series) Circular No. 10, dated 11 July 2022 [3].
• Since August 2025, AD banks can open SRVAs without prior RBI approval [2].
• SRVA balances can be invested in G-Secs and T-Bills without FPI registration, and they are freely repatriable [1]. Surplus balances can also go into corporate debt [4].
• Trap: under the SRVA route, the rupee exchange rate is market-determined, not fixed by the RBI [1].
• Trap: an existing Rupee Vostro Account cannot be converted into an SRVA [1].

Mains Points

• Vostro accounts are a tool to reduce risk, not to replace the dollar.
• Rupee settlement through SRVAs cuts India's need for dollars.
• It also removes exchange-rate risk for Indian traders, because they are billed in rupees.

• This targets the 1991-type weakness of having too few forex reserves, without India openly de-dollarising.

• The trade-deficit limit.

• Vostro settlement works only if partners can use the rupees they earn. The Russia build-up showed what happens when they cannot.
• The fixes are to open investment routes (G-Secs, T-Bills, corporate debt) [1][4], raise exports, and let partners use rupees to pay third countries.

• A fully usable rupee needs fuller capital account convertibility. But that also exposes India to sudden capital outflows, which is why the IDG proposes a phased path [5].

• Sanctions and strategic autonomy (GS-II/GS-III).

• Russia's reserves were frozen in 2022. This showed that payment channels built only on the dollar can be blocked for political reasons.
• Rupee vostro channels and LCS deals give India more ways to pay. This protects economic security and India's freedom to choose its own trade partners.

Related concepts

• Dollarisation
• De-dollarisation
• Rupee internationalisation
• Rupee trade settlement
• Local currency settlement

Read more

• Dollar dominance, de-dollarisation and rupee internationalisation