image source: ThesisBusiness

 A few days ago, The Reserve Bank of India (RBI) made a historical announcement. They made the Indian Rupee global. This means they will no longer depend on the US dollar for trading. But I'm not going to discuss that news in this article as that's not the purpose of this blog ( If you still want to know more about that news you can click here). 

When the news came, two words that I frequently came across were "Nostro account" and " Vostro account" and I decided to explain these terms to those who are not from a financial or economic background in easy language. So let's dig into it!

Meaning of Nostro & Vostro Accounts

When a local bank opens an account with a foreign bank in the country of a foreign bank and is operated in the currency of that country it's called a nostro account. If this definition went straight over your head then don't worry we'll break it into smaller parts and try to understand them with an example 

Let's suppose there is a bank in India and the name of that bank is ABC Bank and there is another bank in the USA with the name XYZ Bank. ABC Bank will open an account in XYZ Bank and this account will be called a nostro account. Since the currency of the US is dollars therefore the balance of this account will be in dollars too. 

Look at the image below to get an idea. 



So, what is a vostro account then? From ABC Bank's perspective, it's a nostro account but from XYZ Bank's perspective, it will be vostro account. 

It's all about perspective. Remember, the bank that will open an account in another country( In our example that another country is the US) to them (ABC Bank) that account will be called nostro account. And for another country (US) in which that foreign account (Nostro) is opened, that account will be called vostro account.   

Summary: 

  • ABC Bank needs a "$" denominated A/c in USA.
  • It approaches XYZ Bank (USA) and requests for opening such account.
  • XYZ Bank accepts this request of ABC Bank.
  • Now, ABC Bank has an account with XYZ Bank (in US$).
  • For ABC Bank this account will be called nostro account.
  • For XYZ Bank this account will be called vostro account.

Now, what will happen if the role of these banks will be reversed? Suppose XYZ Bank (US) wants to open an account with ABC Bank (India). In such a case the name of nostro and vostro account will be reversed too. For ABC Bank this account will be called vostro account and for XYZ Bank this account will be called nostro account.  

How Do these Nostro-Vostro A/c's Impact Us?

Suppose you live in the US and your family lives in India and you want to send 100k dollars to your family who lives in India, how will you do that? 

Well, you will go to XYZ Bank which is in your country (US) and that bank has a "nostro" account in India with ABC Bank. XYZ Bank will send these 100k $ to ABC Bank. But ABC Bank won't give your family those 100k dollars directly. As you know the currency of India is the Indian rupee. So first ABC Bank will convert this 100k dollars into Indian rupee as per the conversion rate ( whatever conversion rate would be going on at that particular point of time). Let's assume the conversion rate at that moment would be 1$=60 INR. So ABC Bank will give your family 60,00,000 Indian rupee.

I hope by now you know these terms thoroughly. I tried not to get into technical details and explain as simply as I could. I hope you find this blog useful.