India & SL promote using INR for bilateral transactions

Using Indian Rupees (INR) to purchase essentials including medicines from India and maintain cross-border transactions with Sri Lanka is being considered as the move would help save US dollars from flowing out of the country and boost Sri Lanka’s foreign reserves.

Since Sri Lanka is recovering from its worst economic crisis, it needs all the measures it can take to keep the momentum. Saving USDs as much as possible is one of the most sought-after methods and using INR to maintain transactions with India will undoubtedly provide a great relief to Sri Lanka’s economy.

Several local banks have already started accounts enabling transactions for tourism. Bank of Ceylon, State Bank of India and the Indian Bank had already started Vostro/Nostro accounts in Indian rupees after the Reserve Bank of India (RBI) and the Central Bank of Sri Lanka enabled the process in 2022.

Meanwhile, the High Commission organised a discussion on the use of INR for economic transactions between India and Sri Lanka.  

The participating banks outlined the benefits of settlements denominated in INR which includes shorter timelines, lower exchange costs and easier availability of trade credits.

The Indian High Commission said the possibility of expanding the INR facility to settle trade and capital transactions is also being considered.

“The beneficial impact of this initiative on the tourism and hospitality industry was also highlighted including its role in helping increase collections which could be utilized by other sectors,” it said.

Central Bank Governor Nandalal Weerasinghe was also quoted as saying that there was a strong desire among Indian and Sri Lankan business communities for trade settlements in Indian rupees.

He called for expanding this facility over a period of time to utilize it for the full range of capital and current account transactions.  

According to the Indian High Commission, a team from RBI joined a recent discussion held online and indicated the possibility of settling current and permitted capital account transactions. The RBI team referred to the close cooperation with CBSL and RBI’s commitment to further facilitate this process.

High Commissioner of India to Sri Lanka Gopal Baglay highlighted the positive impact that the initiative will have in the joint efforts for building a stronger and closer economic partnership between the two countries through trade and investment led measures. He also mentioned the ongoing cooperation between India and Sri Lanka in the area of digital payments and the potential it possesses for enhancing the economic relationship between the two countries.

The benefit of settling loans in INR was also discussed by the participating banks, including quicker timescales, cheaper exchange rates, and simpler access to trade credits, among other factors.

Sri Lanka’s decision to move towards the use of the INR for economic transactions with India will not only assuage Sri Lanka’s currency crisis but also will improve its bilateral ties with India.

India and Sri Lanka have continued to hold high-level visits and meetings and have signed several agreements in recent years to strengthen their economic and security ties.  

Designating INR as a legal currency in Sri Lanka will provide the country much needed liquidity support to help it tide over its economic crisis amid inadequate dollar liquidity.

The decision is also in accordance with the Indian government’s efforts to popularize the Indian Rupee among Asian nations and reduce dollar dependence.

The RBI has put in place a mechanism to settle international trade in rupees “in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the rupee.”

The RBI mechanism is expected to facilitate importers and exporters to avoid rules that prevent the use of a global currency such as the US Dollar for trade with certain countries. After Russia attacked Ukraine, several countries had imposed sanctions on Russia. Indian companies which were looking for alternative modes of payment for imports can make use of the new mechanism.

However, this move has also gained in significance in the backdrop of the recent economic upheaval in Sri Lanka where one Sri Lankan rupee equals 0.22 Indian rupee.

The currency swap has the potential to draw foreign investors who will be attracted by the stability of a substitute currency and show greater willingness to be paid in INR rather than the domestic currency LKR, which might be subject to losses on foreign exchange markets. Further, with a foreign currency, the economy is unlikely to face a balance of payments crisis when speculators take flight and sell domestic currency.

Foreign investors will be attracted by the stability of a substitute currency and show greater willingness to be paid in dollars or in our case in INR rather than the domestic currency LKR, which might be subject to losses on foreign exchange markets. Further, with a foreign currency, the economy is unlikely to face a balance of payments crisis when speculators take flight and sell domestic currency.