Account classification determines the interest treatment
RBI's exchange-house Vostro Master Direction, updated on 1 October 2026 and checked on 28 October 2026, says rupee Vostro balances under paragraph 3(f) do not qualify for interest. That does not eliminate the separate interest provisions for DDA earnings or qualifying collateral deposits. Build an account-by-account interest bridge rather than applying one rate to the exchange house's combined funds. This guide addresses entitlement and reconciliation, not collateral-day sizing. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
Separate the DDA period from the rupee Vostro
Paragraph 5(A)(f) provides that interest earned on amounts deposited with the DDA up to transfer to the drawee bank's nostro accrues to the exchange house. Identify the actual foreign-currency deposit, value dates and transfer record. Do not continue the DDA earning assumption merely because the subsequent rupee Vostro remains funded. Use the actual bank terms for rate, day count and accrual; the direction does not prescribe the fictional rates used below. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
An AD-bank-named collateral deposit has its own interest instruction
The DDA and Non-DDA collateral paragraphs state that the deposit is in the AD bank's name with interest at market-related rates payable to the exchange house placing it. Reconcile the actual deposit instrument and agreed terms rather than assuming that the named account holder must retain the interest. This accounting distinction does not itself decide unrestricted withdrawal, beneficial-title questions beyond the direction, taxation or repatriation permissions. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
Foreign-currency drawing collateral is another separate population
Paragraph 6(h) requires the described deposit for foreign-currency draft drawing arrangements and says the AD bank should allow interest at an appropriate rate. Retain that arrangement's records separately from rupee RDA and DDA balances. A bank guarantee offered as collateral is not a cash deposit earning interest on its face value merely because its amount appears in the same risk-cover schedule. Any guarantee fee or separate cash margin has its own contractual analysis. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
Calculate accrual from supported contractual inputs
For each interest-bearing deposit, retain principal by value-date interval, currency, agreed annual rate, day-count convention, permitted period and actual credited interest. Reconcile rate changes, rollovers and partial releases rather than multiplying closing principal by a full-year rate. The illustrations use explicitly fictional simple-interest contracts and a 360-day basis; neither that day count nor any example rate is prescribed by RBI here. Keep currency units consistent and translate only under the applicable accounting policy. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
Keep entitlement, accrual and credit distinct
An amount accrued under valid terms may differ from cash interest already credited. Investigate the difference using bank statements and confirmations; do not label every difference a default. Conversely, a mistaken interest entry on the non-interest rupee Vostro needs an authorised correction rather than being retained as a valid entitlement. Preserve the source account and period so that the same interest is not counted as both DDA earnings and collateral income. Tax withholding and other applicable compliance require separate verification. RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h).
Applicable primary references
RBI exchange-house Vostro Master Direction: paragraphs 3(f), 5(A)(f), collateral provisions and 6(h)
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Rupee Vostro is not an interest-bearing deposit
Assume an otherwise supported rupee Vostro principal balance ₹20,00,000 contains a separate erroneous interest credit ₹30,000, so the statement total is ₹20,30,000. Under the stated verified facts, an authorised correction removes ₹30,000 and restores ₹20,00,000. The credit does not override paragraph 3(f).
Illustrative example 2: DDA earning period
Assume a USD 10,00,000 DDA deposit earns a fictional simple annual 4% for three contractual days on a 360-day basis up to the relevant transfer. Interest is USD 333.333333…, rounded to USD 333.33. The direction allocates the described DDA earnings to the exchange house; the model does not extend this rate to the subsequent rupee Vostro.
Illustrative example 3: Cash-collateral accrual
Assume qualifying USD 5,00,000 cash collateral has an agreed fictional simple 5% rate for ninety days on a 360-day basis. Accrual is USD 6,250. The assumed rate and day count are contractual inputs; the actual deposit and entitlement must be established separately.
Illustrative example 4: Two deposit tranches
Assume a qualifying USD 2,00,000 tranche at fictional 5% for sixty days and a separate USD 3,00,000 tranche at 4% for ninety days, both simple on a 360-day basis. Accruals are USD 1,666.666666… and USD 3,000, totalling USD 4,666.67 after final rounding. Neither tranche is treated as outstanding for the other's period.
Illustrative example 5: Accrual versus credited cash
Assume independently verified contractual accrued interest USD 6,250 and actual interest credited USD 5,000 for the same deposit and period. The reconciliation difference is USD 1,250. Obtain bank evidence about timing, adjustments or errors before deciding its accounting or alleging non-payment.
Illustrative example 6: Guarantee face value is not cash interest principal
Assume collateral is solely a USD 5,00,000 bank guarantee with no associated interest-bearing cash deposit. Applying a fictional 4% for ninety days on a 360-day basis would incorrectly project USD 5,000 of deposit interest. That projection has no deposit principal on these facts; any guarantee fee or separate margin is a different contractual item.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify every account and instrument | Rupee Vostro, DDA, collateral cash deposit or guarantee |
| 2 | Match the legal arrangement | Rupee RDA versus foreign-currency drawing terms |
| 3 | Read the applicable interest clause | Paragraph 3(f), DDA earnings or collateral instruction |
| 4 | Establish the interest recipient | Direction and actual deposit documentation |
| 5 | Confirm principal intervals | Currency, value dates, rollovers and releases |
| 6 | Confirm contractual terms | Rate, simple or compound basis and day count |
| 7 | Limit the accrual period | Actual transfer, maturity and release evidence |
| 8 | Recalculate by tranche | No closing-balance shortcut or currency mixing |
| 9 | Reconcile credits and corrections | Bank statement, confirmation and authorised error treatment |
| 10 | Retain the closing bridge | Entitlement, accrual, cash credit and separate tax/compliance review |
Sixteen practitioner FAQs
1. Do paragraph 3(f) rupee Vostro balances qualify for interest?
The direction states that they do not.
2. Does that prohibit every other exchange-house deposit from earning interest?
No. DDA earnings and collateral deposits have separate provisions.
3. Who receives the described DDA earnings?
Paragraph 5(A)(f) allocates those earnings to the exchange house.
4. Does the DDA earning period automatically continue after transfer to the nostro?
No. Establish the period described by the clause and the actual account terms.
5. Must an AD-bank-named collateral deposit's interest necessarily stay with that bank?
The stated collateral instructions provide interest payable to the exchange house placing the deposit.
6. Does this alone decide every ownership or withdrawal question?
No. Keep the interest instruction distinct from other legal restrictions.
7. What does paragraph 6(h) say about its deposit interest?
The AD bank should allow interest at an appropriate rate.
8. Is a guarantee face amount automatically interest-bearing cash?
No. Identify whether any actual cash deposit or margin exists.
9. Are the example rates RBI market quotations?
No. They are fictional contractual assumptions.
10. Is a 360-day convention compulsory under this guide?
No. It is an explicit model assumption; use actual valid terms.
11. Can one closing principal be applied to every day automatically?
No. Reconcile principal changes and contractual periods.
12. Can DDA and collateral interest be added without tracing entries?
Trace the source account and period to prevent duplication.
13. Is accrued interest necessarily already credited cash?
No. Reconcile the two amounts separately.
14. Does a reconciliation gap prove a banking default?
No. Investigate timing, terms, adjustments and evidence.
15. Can an erroneous rupee Vostro interest credit simply be retained?
Use the bank's authorised correction process on verified facts.
16. Does the calculation decide withholding or repatriation treatment?
No. Those require their own applicable-law review.
Conclusion
Reconcile exchange-house interest by account type, keeping non-interest rupee Vostro balances separate from DDA earnings, cash collateral and guarantees.