By: Staff Writer
February 28, Colombo (LNW): Top officials from the central banks of India and Sri Lanka recently held discussions to explore the potential of increasing the use of their local currencies, the Indian Rupee (INR) and the Sri Lankan Rupee (LKR), in cross-border transactions.
The discussions took place during a roundtable titled INR-LKR Trade Settlement: Strengthening Bilateral Economic Ties, organized amid India’s efforts to internationalize the INR.
India remains Sri Lanka’s largest trading partner, with annual bilateral trade exceeding $5.5 billion. India exports over $4 billion worth of goods to Sri Lanka, while Sri Lankan exports to India total around $1.5 billion.
In a bid to enhance trade efficiency, the Central Bank of Sri Lanka designated the INR as an authorized foreign currency in August 2022, facilitating easier banking transactions and reducing costs for small-scale traders.
Aditya Gaiha, Chief General Manager of the Reserve Bank of India (RBI), elaborated on the INR’s internationalization and the INR-LKR trade settlement mechanism at the roundtable.
He also highlighted key RBI policies allowing investments in INR within Sri Lanka and amendments to the Foreign Exchange Management Act (FEMA) aimed at expanding the use of INR in cross-border transactions.
Governor of the Central Bank of Sri Lanka, Nandalal Weerasinghe, emphasized the significance of this mechanism and urged banks to collaborate with policymakers to streamline the process.
This initiative aligns with commitments made during Sri Lankan President Anura Kumara Dissanayake’s recent visit to India, where he and Indian Prime Minister Narendra Modi reaffirmed their focus on strengthening INR-LKR trade settlements to deepen economic ties.
In a significant move, the RBI has further relaxed foreign exchange regulations to promote the use of the INR and other currencies in international transactions.
Indian exporters can now open foreign currency accounts overseas, receive payments in these accounts, and use them for import settlements.
This shift is expected to reduce costs for traders in both countries by eliminating intermediary bank charges and mitigating exchange rate risks.
Several Sri Lankan banks have already established INR-denominated Nostro accounts to facilitate direct transactions with Indian counterparts.
Additionally, Sri Lankans can now hold up to $10,000 worth of INR in physical form, though it remains a foreign currency rather than legal tender in Sri Lanka. This move provides much-needed liquidity support to the Sri Lankan economy..
The adoption of INR transactions aligns with India’s broader strategy to increase the Rupee’s usage among Asian nations and reduce dependency on the US dollar.
To support this mechanism, Sri Lankan banks are required to sign agreements with Indian banks to open INR Nostro accounts. Additionally, offshore banking units (OBUs) in Sri Lanka have been authorized to accept deposits from non-residents, further facilitating trade and investment.
While the INR’s growing role in Sri Lanka’s economy has led to speculation that it might replace the LKR in certain sectors, experts believe full currency substitution could impact Sri Lanka’s national sovereignty.
However, the stability of INR could attract foreign investors and reduce balance of payment risks for Sri Lanka, similar to how Bhutan and Nepal use the INR for trade due to their close economic ties with India.
