India Likely to Begin Trading with Sri Lanka in rupees

by mehekkaoberoi

Bасkgrоund:-

  • Till May, the payments for the trade between India and Sri Lanka were settled through Asian Clearing Union (ACU) mechanism. ACU is a payment arrangement between the Central Banks of India, Iran, Bangladesh, Bhutan, Sri Lanka, Pakistan, Maldives, Myanmar, and Nepal. The members of ACU will settle intra-regional transactions on a net basis. ACU transactions are settled with US Dollar, Euro, and Japanese Yen. 
  • As per the RBI circular released on 13th May 2022, RBI allowed Indo-Sri Lankan trade transactions to be settled in Indian National Rupee (INR). Similarly, according to the RBI circular released on 8th July 2022, RBI allowed INR settlement for all current account transactions between India and Sri Lanka. This decision was taken due to the difficulties faced by Indian exporters in getting payments from Sri Lanka. 
  • Amidst the economic and political instability in Sri Lanka, the Indo-Sri Lankan trade drastically declined.

Linkаges:- 

  • This move will enable India to sustain as a key trading partner to Sri Lanka in the long run. Moreover, this move may reduce the dependence of the Sri Lankan economy on China.

Сurrent  Sсenаriо:-

  • According to the New Indian Express, India is more likely to begin trading with Sri Lanka in rupees, following Ranil Wickremesinghe being elected as the new President of the Crisis-hit Sri Lanka. 
  • Recently, the Governor of the Central Bank of Sri Lanka (CBSL) spoke at the Indian CEO Forum (ICF). He addressed the gathering about introducing Indian Rupee as foreign exchange for transactions.

Imрасt:-

  • It encourages the Indian exporters to sign trade agreements with Sri Lanka confidently. In other words, it promotes Indo-Sri Lankan bilateral trade. 
  • Trading using Indian Rupee with Sri Lanka is a small step taken by India towards making Rupee a globally accepted currency for international transactions. 
  • Using INR for current account transactions with Sri Lanka will give INR (Indian rupees) a high exposure to economic shocks affecting the Sri Lankan Economy. Thus, in a way, accepting Indian rupees for current account transactions with Sri Lanka will be riskier for India.

Curated by- Jeffrey

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