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In News
- Recently, Sri Lanka has agreed to use the Indian rupee (INR) for international trade.
More about the news
- Indian rupee trade settlement mechanism:
- The Government of India said it is looking at ways to bring countries that are particularly short of dollars into the ambit of Indian rupee trade settlement mechanism.
- Sri Lanka’s move:
- The Central Bank of Sri Lanka (CBSL) said it is waiting for RBI’s (Reserve Bank of India) approval to designate the Indian rupee as foreign currency of Sri Lanka.
- Sri Lankan banks have reportedly opened a special rupee trading account called – Special Vostro rupee accounts, or SVRA – for trading in INR.
- Russia’s move:
- Russia is also expected to be one the first countries to use the Indian rupee trade settlement mechanism.
- Other countries in the league:
- Not just Sri Lanka and Russia India’s rupee trade settlement mechanism is also attracting interest from other countries including Tajikistan, Cuba, Luxembourg and Sudan.
- India is in talks with the UAE and Saudi Arabia to allow settlement of trade in the Indian rupee.
- Also, the neighbouring island nation has requested RBI to facilitate and promote trade as well as tourism in the SAARC region.
Benefits for Sri Lanka
- Liquidity support:
- Severe economic crisis and dollar crunch have been weighing on Sri Lanka for almost a year.
- Designating the Indian rupee as a legal currency will provide the island nation with much-needed liquidity support.
- Holding more amount in physical form:
- With the opening of Vostro accounts, people in Sri Lanka can now hold USD 10,000 (Rs 8,26,823) in physical form.
- Substituting Dollar:
- Also, Sri Lankans and Indians can use Indian rupees instead of US dollars for international transactions between each other.
Indian rupee trade settlement mechanism
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Significance of Indian rupee trade settlement mechanism for India
- Exports and imports in the Indian currency:
- The mechanism will enable all exports and imports to be denominated and invoiced in the Indian currency.
- The exchange rate between the trading partners will be settled by the market.
- The mechanism will enable all exports and imports to be denominated and invoiced in the Indian currency.
- Reducing India’s trade deficit:
- Notably, the rupee becoming an international currency would possibly reduce India’s trade deficit and will help strengthen it in the global market.
- Disruptions in the market:
- The kind of disruption due to the Russia-Ukraine war which have been experienced all over, countries are looking at alternative modes of payment & the rupee trade settlement mechanism is the effective way out for India.
- India’s trade with Russia:
- This mechanism assumes significance amid a widening trade gap between Russia and India.
- While Russia has swiftly become India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the lack of a smooth payment mechanism.
- This mechanism assumes significance amid a widening trade gap between Russia and India.
- UAE & Saudi Arabia:
- The UAE is a big market for India, so obviously the traders in the country will benefit from this move.
- Similarly, Saudi Arabia is a significant trading partner of India.
- However, the problem lies in the fact that we are a net importer from both these countries, so the excess rupee management can be an issue
Way Ahead
- There are other countries looking into the business. So cost, competitiveness and several factors will play a role.
- Indian exporters have a diversified market.
Vostro & Nostro Account
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Source: ET
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