NOSTRO and VOSTRO Accounts
A fundamental feature of foreign exchange transactions is that the useful possession of any currency can be had only in the country in which it is a legal tender or countries in which it is circulated. (e.g., US Dollar is widely circulated in Russia, CIS countries). Therefore, in order to be able to put through foreign exchange transactions, banks normally maintain stocks of foreign currencies in the form of bank accounts (usually current accounts) with their overseas branches/correspondents. Such a foreign currency account maintained by a bank at an overseas centre is usually designated by it as ‘NOSTRO Account’ (i.e. “Our account with you”). Thus, banks in India may maintain a pound-sterling account with its London office/correspondent; such account would be called by it as NOSTRO Account. Conversely, if a foreign bank is to deal in a local currency of another country, it would maintain a ‘VOSTRO Account’ (i.e. ‘your account with us’) with the local bank, e.g. a bank in England may maintain a ‘VOSTRO Account’ in Indian Rupee with a correspondent bank in India. A VOSTRO account is in substance no different from any other account in the local currency.