New Delhi: The Reserve Bank of India on 11 July, asked banks to put in place additional arrangements for export and import transactions in Indian rupees in view of increasing interest of the global trading community in the domestic currency, reported PTI.

The central bank said in a circular instructed that before putting in place this mechanism, banks will require prior approval from the foreign exchange department of  RBI. “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR,” it said.

For settlement of trade transactions, the concerned banks will require Special Rupee Vostro accounts of correspondent bank/s of the partner trading country.

According a report by The Hindu, the RBI’s move would facilitate trade with countries under sanction like Iran and Russia. But this decision has also gained in significance in the backdrop of the recent economic upheaval in neighbouring Sri Lanka — currently, one Sri Lankan rupee equals 0.22 Indian rupee.

Speculations are rife that the Sri Lankan Rupee (LKR) will be substituted with the INR in certain segments of the economy, according to Sri Lankan news agency The Sunday Morning.

The comes when Nandalal Weerasinghe, the Governor of Sri Lanka’s Central Bank on Sunday, said that the country’s economy is likely to contract by over six per cent this year —  worse than in the pandemic-affected 2020, when the economy shrank 3.5 per cent.

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.

However, former director of the Central Bank of Sri Lanka and Advocata Institute Senior Visiting Fellow  Roshan Perera stated that she did not think that it was possible to use the INR in parallel to the LKR in Sri Lanka if the substitution was to take place in a few selected sectors, it reported.

Perera said, Bhutan and Nepal are using INR mainly because most of the goods in their respective countries come from India and therefore it makes sense to pay for these products in INR because they had already been priced in INR terms. However, she said that is not case with Sri Lanka.

Economist and Frontier Research (Pvt) Ltd Product Head – Macroeconomic and Thematic Research — Chayu Damsinghe told The Sunday Morning that the partial substitution may not change ‘anything much’. While University of Colombo Faculty of Arts Department of Economics Senior Lecturer and Attorney-at-Law Shanuka Senarath said that if Sri Lanka were to substitute the LKR with the INR or any other foreign currency, it would probably mean that part of Sri Lanka’s national sovereignty would no longer be in its control.

It is interesting to note here that following the Russian invasion of Ukraine, in southern Kherson region the ruble is being used alongside the Ukrainian hryvnia. Similarly, Haiti uses the US dollar alongside its domestic currency the gourde, and Cambodia used it alongside the Cambodian Riel for many official transactions.

The Diplomat, however, reports that at this point of time an IMF bailout is a must,

as currency swaps with India and China alike have been insufficient in ameliorating the foreign-exchange crisis. Yet the IMF will set strict conditions, including a necessary consensus from the creditors regarding debt restructuring. That looks unlikely at the moment, with one of the major bond-holders of the government filing a lawsuit against the Sri Lankan state for a bond payment due in July 2022. Sri Lanka can neither get more foreign exchange, nor more debt relief, without substantial and shocking readjustments to its domestic economy.

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