India and Russia are actively working together to address lingering problems associated with the rupee trade mechanism, particularly issues related to the exchange rate mechanism and the repatriation of funds. This collaborative effort aims to resolve challenges with the special Rupee Vostro account system, which have not yet been fully resolved.
The Rupee Vostro account system involves bank accounts, generally in a foreign currency, held by one bank on behalf of another. It enables the bank to offer services to its clients in overseas markets by utilizing the respondent bank’s local banking infrastructure.
The Reserve Bank of India (RBI) introduced this mechanism in July 2022 to allow local traders to settle imports and exports in rupees, especially amid western sanctions on Russia. As reported earlier, Russian funds worth approximately $10-12 billion were estimated to have been invested in Indian government treasury bills during the fiscal year ending March 31, 2023, due to a surge in trade deficit, resulting in higher surpluses in the vostro accounts.
Despite the challenges, Russia remains committed to the rupee-trade mechanism and is unlikely to unilaterally withdraw from it. Any potential withdrawal would likely involve agreements between both sides, according to a senior government official. The US dollar continues to be the preferred currency for trade; however, promoting trade denominated in rupees offers Indian traders the advantage of reducing currency conversion costs.
India has allowed banks from 22 partner countries, including Bangladesh, Germany, Israel, Russia, Sri Lanka, and the UK, to open ‘vostro’ accounts in the country. India’s import of oil from Russia has substantially increased over the past year, with crude imports reaching $31 billion in FY23, compared to $2.5 billion in the previous year and $900 million in FY21.
This surge in imports has led to a widening trade deficit with Russia, reaching $43 billion in FY23, compared to $6.6 billion and $2.8 billion in FY22 and FY21, respectively. A Bloomberg report in June highlighted that the trade gap has resulted in Russia accumulating up to $1 billion each month in rupee assets stranded outside the country.
The collaborative efforts between India and Russia to resolve issues related to the rupee trade mechanism aim to facilitate smoother trade transactions and strengthen economic ties between the two nations.
