India and Sri Lanka are exploring the possibility of using the Indian Rupee (INR) for economic transactions in order to strengthen their partnership through trade and investment-led measures. Recently, the High Commission of India organised a discussion in Colombo, on the use of the Indian Rupee for transactions between the two countries.
Representatives from the Bank of Ceylon, State Bank of India and the Indian Bank shared their experiences during the discussion and informed the audience that they had already started carrying out INR (Indian Rupee)-denominated trade transactions through Vostro/Nostro accounts.
This has been possible after the creation of an enabling framework by the Reserve Bank of India (RBI) and the Central Bank of Sri Lanka (CBSL) in 2022. The participating banks also highlighted the benefits of settlements denominated in INR which include shorter timelines, lower exchange costs, and easier availability of trade credits. They also said the positive impact that this initiative will have on the tourism and hospitality industry.
High Commissioner of India to Sri Lanka, Gopal Baglay, said the importance of this initiative in building a stronger and closer economic partnership between the two countries through trade and investment-led measures.
State Finance Minister, Shehan Semasinghe, appreciated the close economic relationship between the two countries and the financial and humanitarian support extended by India over the past year. This includes the strong financing assurances provided by New Delhi, in the context of the IMF support program for Sri Lanka.
It is noteworthy that India extended assistance worth over U$ 3.8 billion to Sri Lanka last year to help it deal with the economic crisis.
The use of INR for economic transactions between India and Sri Lanka is expected to enhance trade and investment between the two countries, and provide mutual benefits. CBSL Governor Dr. Nandalal Weerasinghe, has expressed a strong desire among Indian and Sri Lankan business communities for enabling trade settlements in INR.
Account transactions
He called for expanding this facility over a period of time, to utilise it for the full range of capital and current account transactions. More than 300 attendees participated in the discussion, including a team from RBI, which joined in the online format and indicated the possibility of settlement of current account transactions in goods, as well as services, in INR. The RBI team referred to the close cooperation with CBSL and RBI’s commitment to further facilitate this process.
Sri Lanka was hit by an unprecedented financial crisis in 2022, which was the worst since its independence from Britain in 1948. The country suffered from a severe paucity of foreign exchange reserves, leading to political turmoil and the ouster of the all-powerful Rajapaksa family. To help deal with the crisis, the IMF approved a US$ 2.9 billion bailout package over four years. However, the IMF seeks to restructure Sri Lanka’s debt with creditors, both bilateral and sovereign bondholders.
Against this backdrop, the initiative to use INR for cross-border transactions with Sri Lanka is being taken forward. Banks have already started accounts enabling the process for tourism, and there is the possibility of expanding to settling trade and capital transactions. This initiative is expected to have a positive impact on the bilateral economic relationship between the two countries. Using the INR for economic transactions can certainly have potential benefits in building a stronger and closer partnership through trade and investment-led measures between the two countries. Here are some of the potential advantages:
Cost savings: If both countries use the same currency for trade transactions, it can save costs associated with currency conversions, which can be significant in international trade. This can include fees charged by banks or other financial intermediaries, as well as potential losses due to fluctuations in exchange rates. In addition, using a common currency can simplify accounting and reduce administrative overheads associated with managing multiple currencies.
Exchange rates
Reduced exchange rate risk: By using the same currency, both countries can avoid the risks associated with fluctuations in exchange rates. This can provide greater stability and predictability in trade and investment flows. When two countries use different currencies for trade transactions, there is always a risk that fluctuations in exchange rates can affect the value of payments and investments.
This can create uncertainty and volatility that can be harmful to businesses and investors. By using the same currency, both parties can avoid this risk and provide greater stability and predictability to trade and investment flows. Improved transparency: Using a common currency can make transactions more transparent, reducing the likelihood of disputes arising from misunderstandings or differences in interpretation. When transactions are conducted in different currencies, there is always the potential for misunderstandings or disputes due to differences in interpretation or calculation.
By using the same currency, both parties can reduce the likelihood of such disputes arising, since the terms of the transaction are clearer and more easily understood.
Greater trade volumes: A common currency can make trade transactions more convenient and faster, potentially increasing the volume of trade between the two countries. This is because currency conversions can add friction to transactions, and some businesses may avoid dealing with currencies they are not familiar with. By using a common currency, both parties can remove this friction and make transactions more straightforward.
Enhanced political relations: The use of a common currency can help build trust and cooperation between the two countries, which can have positive spill-over effects on other areas of the bilateral relationship. For example, it can create a sense of shared economic interest that can foster greater diplomatic and strategic cooperation. In addition, it can provide a platform for deeper economic integration, such as through the creation of a common market or customs union. However, there are also potential challenges associated with the use of a common currency, such as concerns about the impact on monetary policy and the potential for currency manipulation. Additionally, the decision to adopt a common currency is a complex one that requires careful consideration of various economic, political, and social factors.
Meanwhile, Indian tourists visiting Sri Lanka can now transact in INR as the CBSL has designated it as a foreign currency. The designation of INR as a foreign currency will facilitate trade settlement between the two nations. Sri Lankan citizens can now hold INR equivalent to USD 10,000 in physical form. This move will also enable Sri Lankans and Indians to use INR instead of USD for international transactions with each other. Sri Lanka becomes the third nation, after Nepal and Bhutan, where INR can be used freely.
Digital payment
Weerasinghe also expressed support for linking digital payment interfaces between India and Sri Lanka. The ease of using INR in the country is expected to give a significant boost to the Sri Lankan tourism industry, as India is its largest source market. Sri Lanka Tourism has been aggressively promoting the destination in India, and it generated 80,000 tourists to Sri Lanka in the first three months of this year.
The writer is an Indian journalist specialising in Indo-Sri Lanka relations