RBI seeks 'vostro' accounts investment cap removal to push Rupee trade

India's central bank has sought the government's approval to remove the cap on foreign banks with so-called vostro accounts buying short-term sovereign debt, to boost rupee-denominated investment and trade, according to two sources and a letter seen by Reuters.

Vostro accounts are typically held by a domestic bank on behalf of a foreign bank in which trading partners can hold rupee-denominated balances emerging from trade transactions.

The Reserve Bank of India (RBI), in 2022, allowed overseas banks to open Special Rupee Vostro Accounts (SRVAs) to settle trade transactions in the rupee as part of its efforts to boost the currency's "internationalisation".

The holders of such accounts can invest in Indian government debt without registering as foreign portfolio investors (FPIs), as overseas investors have to. However, the government slapped a limit of using only 30 per cent of account balances to buy securities with residual maturity under one year, including treasury bills.

"The restriction was intended to encourage long-term capital flows and ensure financial stability. (But) the 30 per cent limit is a major roadblock for entities looking to use SRVAs, especially for managing short-term liquidity," said one of the sources familiar with the matter.

Based on the feedback from vostro account holders, this cap should be removed, the RBI recommended to the federal finance ministry in a letter last month.

Although this limit serves as a prudential measure for FPI investments, it is a significant obstacle for SRVA holders as their investments are typically short-term in nature and meant to be used or repatriated quickly, the RBI said.

The final decision rests with the ministry.

The second source said a targeted relaxation could incentivise broader participation in the SRVA framework and help advance India's goal of "internationalisation" of the rupee.

The central bank and the finance ministry did not respond to an email from Reuters seeking comment. The two sources declined to be identified as the discussions are private.

The RBI has approved 123 correspondent banks from 30 trading partner countries to open 156 SRVAs with 26 Indian banks to promote bilateral trade in local currencies, a junior trade minister told Parliament earlier this year.

The combined balance in all vostro accounts, including SRVAs, was 134.55 billion rupees ($1.60 billion) as of December 2024.

In January, the RBI allowed overseas branches of authorised banks to open rupee accounts for anyone residing outside India and looking to settle current and capital account transactions with someone residing in the country.

It also allowed Indian exporters to open foreign currency accounts overseas for trade payments.