From Dollar to Rupee: Trade Plans for Delhi and Colombo

This move aims to reduce transaction costs and ease pressure on foreign exchange reserves. New terms have also been introduced, allowing Indian companies to invest in Sri Lankan entities using their domestic currency. However, practical challenges remain unresolved.

Colombo (AsiaNews) – Prioritizing local currency over the US dollar: this appears to be Delhi’s policy direction in regional trade, a stance echoed in a request sent to the Colombo government urging greater use of Indian rupees and Sri Lankan rupees in transactions.

The initiative aims to lower transaction costs, alleviate pressure on foreign exchange reserves, and strengthen economic resilience between the two nations. At a roundtable discussion held in the capital on June 22 titled “From Rupee to Rupee: Strengthening the India-Sri Lanka Trade Corridor,” Indian High Commissioner Santosh Jha expressed hope that the closely linked economies could conduct commercial and financial transactions more smoothly.

Proposed jointly by the High Commissioner and driven by the Central Bank of Sri Lanka, the initiative seeks to pave the way for credit institutions in Sri Lanka and Indian bank branches in Colombo to carry out trade transactions directly in Indian rupees. To date, despite close trade ties between India and Sri Lanka, transactions have traditionally been conducted in US dollars.

As High Commissioner Jha pointed out, “Every time an Indian exporter invoices in US dollars, and every time a Sri Lankan importer pays in US dollars, both parties bear unnecessary currency risk.” He continued, “These currencies generate unnecessary conversion costs and increase dependence on third-party currencies—currencies neither party can issue, control, or in some cases even access easily.”

Therefore, he warned: “In uncertain global economic conditions, risk reduction and diversification are becoming increasingly important. Relying on a single dominant mode of transaction is extremely risky in a highly unstable world. New sources of resilience must be created.”

Jha added: “Settling trades in local currencies offers a practical solution to many of these challenges. By enabling direct trade in rupees, businesses can avoid exchange losses, reduce transaction costs, and protect bilateral trade from fluctuations in the US dollar. Local currency settlement transforms the landscape—it reduces transaction costs and eliminates bidirectional conversion losses.”

Experts concluded that this approach protects bilateral trade from US dollar volatility. Aditya Gaiha, Governor of the Reserve Bank of India, stated at the forum: “Key measures include recent amendments to India’s Foreign Exchange Management Act (FEMA), aimed at strengthening the regulatory framework for foreign exchange transactions.”

On the other hand, new provisions have been introduced allowing Indian companies to directly invest in Sri Lankan enterprises using Indian rupees, thereby promoting cross-border trade and investment. This reflects strategic efforts to strengthen economic ties, “while simultaneously simplifying financial interactions between the two countries.”

In an interview with AsiaNews, economic analysts Rajini Gamlath and Mayantha Senanayake revealed: “Given the lower volatility between the Indian rupee and LKR compared to the volatility between USD and LKR, maintaining open exposure to both Indian and Sri Lankan rupees may be more advantageous than holding only USD and LKR.” Therefore, managing the risk of exposure to the Indian rupee through foreign exchange forwards (FX Forwards), under regulatory approval, “will enable” importers and exporters wishing to settle directly in Indian rupees to achieve a smoother transition, as it provides more predictable cash flows than maintaining open positions.

“Meanwhile,” Gamlath and Senanayake noted, “only about 5% to 10% of Indian trade handled by major commercial banks is priced in Indian rupees, with the remainder priced in US dollars. Thus, there is a need to increase the share of Indian rupee transactions to 50–60%.”

However, forward exchange rates for the Indian rupee are not yet available to local banks. “And challenges persist in commercial service payments such as freight charges, with some Indian banks reluctant to bear advisory fees.” Hence, they concluded, “It is essential to address these issues to make rupee-to-rupee transactions more attractive.”

Source: AsiaNews

Author: Arundathie Abeysinghe

Original: toutiao.com/article/1869113855561739/

Disclaimer: The views expressed in this article are those of the author.