From Russian funds with love: Plan mooted to tap rupee balance in special accounts

Can Russian funds tap into the stranded rupee balance generated in the trade between the two countries? In the course of negotiations, some of the Russian financial institutions have sounded out the Reserve Bank of India (RBI) on a mechanism that would let them use the rupees lying in special accounts in India for investment in stocks and securities here.
Till now, 10 institutions from Russia, including its biggest lender, have registered as foreign portfolio investors (FPIs) with Sebi. But they have made little investments — probably, due to the hurdles in cross-border payments caused by US sanctions in the wake of Russia’s war with Ukraine.

If, however, RBI permits the flow of rupees from the trade balance pool to the rupee accounts of Russian FPIs, the latter can invest the amount in securities listed on Indian exchanges. Under the framework suggested, the FPIs could match a transfer of rupees from the pool by paying the equivalent in roubles to Russian companies that have exported to India but are reluctant to accept payments in rupees.

“If India were to allow funding of FPI accounts of Russian FPIs through INR stuck in vostro accounts in India, it could be a win-win for India and Russia,” said Siddharth Shah, partner at law firm Khaitan & Co.

Would Need Green Signal From RBI
“For India,” said Shah, “more global investments into the market, which may continue to remain invested for a much longer tenure, should create a significant inflow in terms of foreign investment. For the Russian entities, it would effectively facilitate liquidity and also allow them to convert their receivables into investments in India and that may create more headroom for the cross-border trade between the two countries to flourish.”

A vostro account is an account that a foreign bank opens with an Indian bank in domestic currency (i.e. rupees). The plan also dovetails with the Indian objective to progressively de-dollarise trade, said Shah.

Such an arrangement, entailing crediting a ‘special non-resident rupee account’ (SNRR) of a foreign entity (like an FPI) with rupees would require a green signal from RBI as SNRR accounts are initiated with inflow of foreign currency that is converted into rupees.

According to a senior banker aware of the issue, technically this should not be a problem as the surplus rupees in the vostro account are essentially payment for import. “In the absence of sanctions, this amount would have been remitted to Russia by converting INR into dollars and dollars into roubles, while Russian FPIs would have done the reverse in bringing money into India. But the central bank and the government would have to think of the optics and other issues,” said the person.

For instance, a few weeks ago, US treasury officials visiting India had met bankers here to figure out how Indian banks were remitting payments for oil imports from Russia at prices beyond the $60-a-barrel cap imposed by the G7 countries and EU.

In July 2022, the RBI came out with a directive on international trade settlement in Indian rupees. There was no mention of Russia in the RBI announcement, but it was perceived to have been aimed at enabling Russian institutions which were barred from using the international messaging system SWIFT that is widely used to confirm cross-border payments. Rupees accumulated in the vostro accounts as India’s imports from Russia exceeded exports to the country. Subsequently, RBI relaxed rules to allow the investment of the surplus in vostro accounts in Indian treasury bills and government bonds. The central bank has not disclosed how much has been invested from the vostro balance in gilts.

“Allowing FPIs to use vostro funds would help in their investments in bonds and equity in India. But they would have a problem in taking the money out when there are redemptions and securities are sold… So, I believe the proposed mechanism stems from the belief that such investments would be long-term in nature and the sanctions would not last forever. Besides, Russian investors, over-exposed to the US and European markets, may prefer some diversification,” said an official with a custodian bank.

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