“For the only way in which a durable peace can be created is by worldwide restoration of economic activity and international trade.”
For importing and exporting goods and services, countries have to make payment in a foreign currency. Since the USD is the world’s reserve currency, most international transactions are settled in dollars. However, Sri Lanka has been dealing with a severe economic crisis for almost a year and is short on dollars. The Indian rupee trade settlement system announced by the RBI allows the use of INR instead of USD and other major foreign currencies for all international transactions.
The Indian government has been attempting to solicit nations with dollar shortages to use the rupee settlement system since July 2022. On July 11, RBI announced the creation of the Indian rupee trade settlement system allowing the use of INR instead of USD for all international transactions.
Banks in Sri Lanka have set up special accounts for trading in INR known as Special Vostro Rupee Accounts, or SVRA. People in Sri Lanka can now hold USD 10,000 (Rs 8,26,823) in real form due to the establishment of Vostro accounts. The Bank of Ceylon, a Sri Lankan bank, has opened a Vostro account with the State Bank of India through the former's branch in Chennai.
How trade settlement in Rupee will help India?
With trade being done in rupees, the national currency gains importance in the trade-partner countries, which in turn, would drive their central bank to create reserves for it. This would, therefore, increase the demand for the Indian rupee and bring in savings that has been accumulated from not having to pay conversion charges to banks. As a result, INR strengthens in the money market and gains value in forex pairs.
But, how will this help Sri Lanka? Settling trade transactions using INR will provide the country with much - needed liquidity support to help it recover from the economic crisis amid inadequate availability of US dollar.
In November, India had approved nine vostro accounts for Russian banks. Russia’s military operations in Ukraine have restricted its ability to trade internationally in prominent global reserve currencies. As a result, it has granted India discounts on oil and the option to trade in Indian rupees.
Trade settlement in INR would reduce dependency on international currencies including the US dollar, euro and yen.
Did you know
Indian entities have previously undertaken trade with Iran to settle energy transactions in the Indian rupee in 2013 and in 2018. However, this arrangement was more limited.
After Russia, about 35 nations have expressed interest in better understanding the rupee trade system. As per reports, Bangladesh, Nepal, Myanmar, Tajikistan, Cuba, Luxembourg and Sudan have also been talking to India about using the system.
BY -
Harsimran Wadhwa
Rohit Sharma
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