Will the Indian rupee replace the Sri Lankan rupee?

The substitution has the potential to attract foreign investors who may show a greater willingness to be paid in INR rather than LKR, who could suffer losses in the foreign exchange markets

Representative image. AFP

New Delhi: On July 11, the Reserve Bank of India requested banks to put in place additional provisions for export and import transactions in Indian rupees in view of the growing interest of the global trading community in the national currency, reported PTI.

The central bank said in an instructed circular that before setting up the scheme, banks will need to obtain prior approval from the RBI’s foreign exchange department. “In order to promote the growth of global trade with a focus on exports from India and to support the growing interest of the 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,” he said.

For the settlement of commercial transactions, the banks concerned will need Special Rupee Vostro accounts of the correspondent bank(s) of the trading partner country.

According to a report by The Hindu, the RBI’s decision would facilitate trade with countries under sanctions such as Iran and Russia. But the move has also gained significance against the backdrop of the recent economic upheaval in neighboring Sri Lanka – currently, one Sri Lankan rupee is equal to 0.22 Indian rupees.

Speculation is rife that the Sri Lankan Rupee (LKR) will be replaced by the INR in some segments of the economy, according to the Sri Lankan News Agency. Sunday morning.

It comes as Nandalal Weerasinghe, the governor of the Central Bank of Sri Lanka, said on Sunday that the country’s economy is expected to contract by more than 6% this year – worse than in pandemic-hit 2020, when the economy fell 3.5%.

The currency swap has the potential to attract foreign investors who will be attracted by the stability of a surrogate currency and show a greater willingness to be paid in INR rather than LKR, who may suffer losses on the foreign exchange markets. Also, with a foreign currency, the economy is unlikely to face a balance of payments crisis when speculators flee and sell the domestic currency.

However, former head of the Central Bank of Sri Lanka and Advocata Institute Senior Visiting Scholar Roshan Perera said she doesn’t think it’s possible to use the INR alongside the LKR. in Sri Lanka if substitution were to take place in a select few sectors, he reported.

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

Economist and Product Manager Frontier Research (Pvt) Ltd – Macroeconomic and Thematic Research – Chayu Damsinghe said Sunday morning that partial substitution may not change “very much”. While Shanuka Senarath, a senior lecturer in the Department of Economics, Faculty of Arts, University of Colombo, said that if Sri Lanka were to replace the LKR with the INR or any other foreign currency, it would likely mean that part of Sri Lanka’s national sovereignty would no longer be under its control.

It is worth noting here that following the Russian invasion of Ukraine, in the south of the Kherson region, the ruble is used alongside the Ukrainian hryvnia. Similarly, Haiti uses the US dollar alongside its national currency, the gourde, and Cambodia has used it alongside the Cambodian riel for many official transactions.

The Diplomat, however, reports that at this point an IMF bailout is much needed as currency swaps with India and China have not been enough to ease the currency crisis. However, the IMF will impose strict conditions, including a necessary consensus of the creditors concerning the restructuring of the debt. This seems unlikely at the moment, with one of the main government bondholders taking legal action against the Sri Lankan state for payment of a bond due in July 2022. Sri Lanka can neither get no more foreign exchange, no more debt relief, without substantial and shocking readjustments to its national economy.

With the contribution of the agencies

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