In July 2022 the Reserve Bank of India allowed the settlement of international trade in Indian rupees through which mechanism?
- A.Special Rupee Vostro Accounts
- B.Exchange Earners Foreign Currency accounts
- C.Non-Resident External accounts
- D.Resident Foreign Currency accounts
Correct answer
Explanation
The correct answer is A, Special Rupee Vostro Accounts. Under the arrangement, an authorised dealer bank in India opens such an account for the correspondent bank of a partner country. Indian importers pay rupees into the account and Indian exporters are paid out of it, and the balance may be invested in Indian government securities. The aims are to cut dependence on hard currency, to save conversion cost and to keep trade flowing with countries facing payment difficulties.
Option B, an Exchange Earners Foreign Currency account, lets an Indian exporter retain part of its earnings in foreign currency instead of converting them. Option C, a Non-Resident External account, is a rupee account for a non-resident Indian, fully repatriable, meant for personal savings and not for trade settlement. Option D, a Resident Foreign Currency account, is for a returning Indian to hold foreign currency brought back. Only the first is a correspondent banking account used for settling trade.
Read the full article: SWIFT, Nostro-Vostro Accounts and Cross-Border Payments
Practice Questions
View allSWIFT, used by banks for cross-border messages, stands for:
- A.Secure Worldwide International Funds Transfer
- B.Society for Worldwide Interbank Financial Telecommunication
- C.System for Wire Transfer of International Financial Transactions
- D.Standard Worldwide Interbank Funds Transfer
Show answer
Explanation
The correct answer is B, Society for Worldwide Interbank Financial Telecommunication. The word Society is the key, because SWIFT is a cooperative society owned by its member financial institutions rather than a company or a public authority. It was founded in 1973 to replace the insecure and unstandardised telex traffic between banks and went live in 1977.
Options A, C and D are invented expansions built around the same letters, and each is wrong on the most important word. None of them contains Society, so a candidate who remembers only that one word can eliminate all three at once. Two further points usually accompany this question: the headquarters are at La Hulpe near Brussels in Belgium, and SWIFT is a messaging network only, so it neither holds accounts nor settles payments. The actual movement of value happens through the accounts banks hold with each other or through a central bank's settlement system.
The headquarters of SWIFT is located in which country?
- A.Switzerland
- B.Belgium
- C.The United States of America
- D.The United Kingdom
Show answer
Explanation
The correct answer is B, Belgium. SWIFT is headquartered at La Hulpe, in the outskirts of Brussels, and it is therefore incorporated under Belgian law and supervised by a committee of central banks with the National Bank of Belgium as the lead overseer. This Belgian location matters in current affairs, because European Union decisions have at times required SWIFT to disconnect banks of particular countries.
Option A, Switzerland, is the most tempting wrong answer, because the first letter of SWIFT suggests it and because Switzerland hosts the Bank for International Settlements at Basel and many international bodies at Geneva. Option C is wrong, though the network has important operating centres in the United States and the Netherlands. Option D is wrong; London is a great financial centre but not SWIFT's seat. Remember the pairing: SWIFT in Belgium, the Bank for International Settlements in Switzerland.
Which statement about SWIFT is correct?
- A.It settles payments between banks and holds their funds
- B.It is a messaging network that carries instructions but does not itself transfer funds
- C.It is a currency exchange run by the International Monetary Fund
- D.It is the clearing house for all cross-border cheques
Show answer
Explanation
The correct answer is B, it is a messaging network that carries instructions but does not itself transfer funds. SWIFT transmits standardised, secure messages such as an instruction to pay a beneficiary or to issue a letter of credit. The value moves only when the banks involved debit and credit the accounts they maintain with one another, or when a central bank settlement system is used.
Option A is the error the question is designed to catch: SWIFT holds no customer or bank accounts and performs no settlement. Option C is wrong because the International Monetary Fund lends to member countries and surveils their economies; it runs no currency exchange of this kind, and SWIFT is a private cooperative of banks. Option D is wrong because cheque clearing is domestic and is handled in India by the Cheque Truncation System. The distinction between messaging and settlement is the single most examinable idea in this chapter.
A nostro account of an Indian bank is:
- A.A rupee account kept by a foreign bank with the Indian bank
- B.The Indian bank's foreign currency account with a bank abroad
- C.A rupee account of a resident individual for foreign travel
- D.An account of the Reserve Bank of India with the Indian bank
Show answer
Explanation
The correct answer is B, the Indian bank's foreign currency account with a bank abroad. Nostro means ours, and the full sense is our account with you. So a dollar account maintained by an Indian bank with a correspondent bank in New York, or a euro account with a bank in Frankfurt, is that Indian bank's nostro account, and it is from such an account that payments to foreign beneficiaries are made.
Option A describes a vostro account, which means your account with us, and it is the mirror image of the right answer; the same account is a nostro to one bank and a vostro to the other, so the label depends on whose books you are reading. Option C describes nothing in this vocabulary, although a resident's foreign exchange needs are met under the Liberalised Remittance Scheme. Option D is simply a current account of the central bank. A linked term is the mirror account, the home-currency record a bank keeps of its own nostro balance for reconciliation.
A rupee account maintained with an Indian bank by a bank situated abroad is called:
- A.A nostro account
- B.A vostro account
- C.A loro account
- D.An escrow account
Show answer
Explanation
The correct answer is B, a vostro account. Vostro means yours, and from the Indian bank's point of view the account is your account with us. Such accounts are held in Indian rupees, and the foreign bank uses them to make and receive payments in India. In the foreign bank's own books exactly the same account is described as a nostro account.
Option A, nostro, would be correct only from the other side of the relationship, and it is the inversion examiners most often test. Option C, loro, means their account and is used when a bank refers to an account that belongs to some third bank and not to itself. Option D, escrow, is a quite different idea: money held by a neutral party until an agreed condition is fulfilled, common in mergers and in real estate. The related Indian term is the Special Rupee Vostro Account, opened for settling foreign trade in rupees under the arrangement of July 2022.