The Reserve Bank of India (RBI) has approved trading between India and Tanzania in national currencies, i.e., the Indian Rupee (INR) and Tanzanian Shilling (TSh), by enabling authorized banks in India to open Special Rupee Vostro Accounts (SRVAs) with correspondent banks in Tanzania, a step that will benefit the business community.
Significance
- Making use of national currencies in bilateral trade settlements is anticipated to lower transaction costs, improve cross-border trade efficiency, conserve foreign exchange (forex), and facilitate seamless domestic payment transactions.
- As a consequence, trade volumes and economic cooperation between India and Tanzania will improve.
Key Points:
i.To trade under this mechanism, authorized banks in India would open SRVAs with correspondent banks in Tanzania.
ii.Tanzanian banks will approach authorized Indian banks to open SRVAs in India, and those banks will then submit the details of the arrangement to the RBI for approval.
iii.It is also reported that Bank of Baroda (BoB), which has branches in Tanzania, has acquired RBI approval to open SRVAs for its foreign branches and subsidiaries in various countries, including Tanzania.
Note: On March 24, 2023, the High Commission of India in Tanzania will host a Stakeholders Consultation Meeting to discuss the bilateral trade mechanism employing local currency and its benefits.
What is the SRVA arrangement?
Vostro account – A “Vostro” account is an account that a domestic bank holds for a foreign bank in the currency of the domestic bank, which in India is INR.
- Rupee Vostro Accounts allow a foreign entity to keep its holdings in Indian banks in INR.
- When an Indian importer makes a payment in INR to a foreign trader, the amount is deposited to this Vostro account.
- When an Indian exporter gets paid for supplying goods or services, the amount will be withdrawn from this Vostro account and credited to the exporter’s account.
Special Vostro Accounts – Normal Vostro Accounts only function as transit accounts, whereas Special Vostro Accounts permit the maintenance of INR (Indian Rupee) balances.
RBI Has Granted Permission for Banks from 18 Nations to Trade in INR
The RBI has granted 60 applications from correspondent banks in 18 different countries to open Special Rupee Vostro Accounts (SRVAs) in order to settle payments in Indian rupees (INR).
- These 18 countries that are currently covered under this arrangement: Tanzania, Kenya, Uganda, Botswana, Fiji, Germany, Guyana, Israel, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, the Seychelles, Singapore, Sri Lanka, and the United Kingdom (UK).
How does it actually function?
i.Authorized banks in India will open SRVAs with correspondent banks of the partner trading countries under the new framework established by the RBI for the settlement of trade transactions with foreign trade partners.
- This shift towards using national currencies for bilateral trade settlement is consistent with the RBI’s objective of encouraging the use of domestic currencies in cross-border transactions.
- This is intended to lessen India’s reliance on foreign currencies, particularly the US dollar.
ii.Indian importers using this mechanism will pay invoices for the supply of goods/services from the foreign seller/supplier in INR, which will be credited into the Special Vostro account of the correspondent bank of the partner country.
iii.Indian exporters using this mechanism to export goods/services can be paid in INR from the balances in the designated Special Vostro account of the partner country’s correspondent bank.
iv.The Rupee surplus balance held by the partner trading country may be used for permissible capital and current account operations in accordance with mutual agreement.
Backdrop
i.In order to increase exports, India has been advocating the idea of trade in local currency, and the SVRA process began in July 2022.
ii.The RBI announced the procedures for trading in INR in Circular No. 10 RBI/2022-2023/90, issued July 11, 2022, on ‘International Trade Settlement in Indian Rupees’.
- The announcement was made in the midst of the commodities crisis caused by Western sanctions imposed on Russia when President Vladimir Putin launched the “Special Military Operation” against Ukraine on February 24, 2022.
iii.Out of the 18 listed countries, Russia has been influential in using trade in local currency for the overall process of “de-dollarization”.
Recent Related News:
i.Bank of Baroda (BoB), the second largest public sector bank in India after State Bank of India (SBI), won EAG Laureate award in the International Olympiad of Financial Security held at Sochi, Russia on 10 October 2022.
ii.India is one of the nine members of the Eurasian group on combating money laundering and terrorism (EAG), a regional organisation similar to the Financial Action Task Force (FATF). The FATF is the global anti- money laundering and anti- terrorist financing body.
About the United Republic of Tanzania:
Prime Minister – Kassim Majaliwa
Capital – Dodoma City
Currency – Tanzanian Shilling (TSh)
