India’s central bank is advocating for the removal of the investment cap on foreign banks' vostro accounts, which would allow them to purchase short-term sovereign debt. This move aims to enhance trade and investment in rupees, as reported by two sources and a letter reviewed by Reuters.

Vostro accounts are typically held by domestic banks on behalf of foreign institutions, allowing trading partners to maintain rupee-denominated balances from trade activities. In 2022, the Reserve Bank of India (RBI) allowed foreign banks to open Special Rupee Vostro Accounts (SRVAs) for settling transactions in rupees, a part of its strategy to boost the currency's global usage.

The holders of these accounts can invest in Indian government securities without registering as foreign portfolio investors (FPIs), a requirement for most overseas investors. However, a limit was imposed, restricting SRVA holders to using only 30% of their account balances to purchase short-term securities (with maturities under one year), including treasury bills.

One source familiar with the situation explained that this limit, intended to encourage long-term investment and ensure financial stability, has become a significant obstacle for entities wishing to use SRVAs, particularly for managing short-term liquidity. Feedback from SRVA holders has led the RBI to recommend to the finance ministry that this cap be lifted.

Despite the cap being a prudent measure for FPI investments, it presents a major barrier for SRVA users since their investments are generally short-term and need to be quickly utilized or repatriated. The RBI’s suggestion to lift the cap aims to encourage broader participation in the SRVA framework and assist in furthering India’s goal of internationalizing the rupee.

The final decision on this matter lies with the finance ministry. Neither the RBI nor the finance ministry responded to Reuters' request for comment, and the sources requested anonymity due to the confidential nature of the discussions.

So far, the RBI has approved 123 correspondent banks from 30 trading partners to open 156 SRVAs with 26 Indian banks, facilitating bilateral trade in local currencies. As of December 2024, the total balance across all vostro accounts, including SRVAs, stood at 134.55 billion rupees ($1.60 billion). In January, the RBI also permitted overseas branches of authorized banks to open rupee accounts for individuals residing outside India and facilitate current and capital account transactions with Indian residents. Additionally, it authorized Indian exporters to maintain foreign currency accounts abroad for trade payments.