GS Paper 3
Source: TH
Context: 20 Russian banks have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.
What is SRVA?
SRVA is an account that domestic banks hold for foreign banks in the former’s domestic currency, the rupee, which allows domestic banks to provide international banking services to their clients who have global banking needs without having to be physically present abroad.
- The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system.
It has three important components:
- All exports and imports must be denominated and invoiced in domestic currency (e.g. Rupee)
- The exchange rate between the currencies of the trading partner countries would be market-determined
- The final settlement also takes place in domestic currency (e.g. Rupee)
Eligibility criteria:
- Banks include approval from the apex banking regulator (e.g. RBI)
- The correspondent bank is not from a country mentioned in the updated FATF Public Statement on High Risk & Non-Co-operative jurisdictions
- All reporting of cross-border transactions is to be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.
Working:
Different types of Accounts:
Benefits ( as per the Economic Survey (2022-23))
- The system could reduce the “net demand for foreign exchange, the U.S. dollar in particular, for the settlement of trade flows”
- Reduce the need for holding foreign exchange reserves
- Reduce the dependence on foreign currencies
- Making the country less vulnerable to external shocks
- Timely payments: Indian exporters could get advance payments in INR from overseas clients and in the long term,
- It would promote Indian Rupee as an international currency once the rupee settlement mechanism gains traction: Currently, the U.S. dollar was the most dominant vehicle currency accounting for 88% of all trades. The INR accounted for 1.6%
Issues:
- Despite Vostro’s account, Indian Banks having large exposure to the EU and US financial system are not willing to verify trade as they fear violating the sanctions on Russia
- A similar Vostro account set up for the purpose of trade with Iran had run dry as India was stopped from sourcing oil from Iran amid US sanctions
- Western countries have put pressure on India to not allow any such mechanism
Insta Links
Prelims Links
The problem of international liquidity is related to the non-availability of (UPSC 2015)
(a) goods and services
(b) gold and silver
(c) dollars and other hard currencies
(d) exportable surplus
Answer: C
Since most International transactions occur in dollars or other hard currencies.
.
The balance of payments of a country is a systematic record (UPSC 2013)
(a) All import and export transactions of a country during a given period of time, normally a year
(b) Goods exported from a country during a year
(c) Economic transaction between the government of one country to another
(d) Capital movements from one country to another
Answer: A
In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world.
