The Reserve Bank of India (RBI) yesterday said authorised Indian banks can settle all current account transactions, including those related to trade with Sri Lanka in any permitted currency outside the Asian Clearing Union mechanism.
The revised norm will be in place “Until further notice” and comes into force with immediate effect, a spokesman for the RBI said. The Asian Clearing Union, or ACU, is a payment arrangement between the Central Banks of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka. Under the ACU, member Central Banks settle payments for intra-regional transactions on a net basis. This reduces the use of foreign exchange reserves and transfer costs.
Currently, ACU settlements are done in three currencies: US dollar, the Euro, and the Japanese yen.
The RBI’s decision on July 8 comes after it had, on May 19, allowed trade with Sri Lanka to be settled in rupees outside the ACU mechanism. This rupee settlement was allowed for transactions falling under the US$1 billion credit facility extended by State Bank of India to Sri Lanka in March for the procurement of food, medicine, and other essential items.
The decisions come at a time when Sri Lanka is facing a severe economic crisis, with its foreign exchange reserves dropping massively even as it has enormous external liabilities. As at the end of May, Sri Lanka had foreign exchange reserves amounting to a mere US$ 1.89 billion as tourism – a key contributor to the island nation’s GDP and forex reserves – has taken a hit from the coronavirus pandemic.