India has allowed Sri Lankan citizens to hold up to $10,000 (8.14 lakh Indian rupees) in Indian rupees in the physical form. They will also be able to convert the neighbour's currency for those of other nations, thus enabling trade.
This could help Sri Lanka amid its unprecedented economic crisis since India, the world's fifth-largest economy, is also one of its major trading partners.
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In 2021-22, bilateral trade between the two countries stood at $6.81 billion, with Indian exports exceeding imports. However, exports nearly halved this year following the economic crisis.
India's move could help both countries
While the Indian rupee cannot be used as legal tender by Sri Lankans under this move, it will give the island nation, facing an acute dollar shortage, some liquidity support for imports. With 22 million people, it has struggled to supply its citizens with food, medicines, fuel, and other essentials for many months.
On the other hand, India's decision also coincides with its efforts to popularize its currency among Asian nations and to reduce its reliance on the US dollar.
It introduced the rupee trade mechanism in July, some months after western countries blocked Russian banks from the SWIFT financial messaging system which facilitates cross-border payments. This new mechanism allowed the settlement of global trade in Indian rupees.
How will the arrangement with Sri Lanka be facilitated?
To enable Sri Lankans to hold Indian rupees, that nation's banks must first have nostro accounts with Indian lenders, the Business Standard reported. Nostro accounts are those opened by a bank with a foreign bank and in that foreign country's currency to facilitate bilateral trade and other financial transactions.
Besides, offshore units of Sri Lankan banks will be set up in India to accept deposits from its citizens living there.
India has also eased regulations to help Sri Lankan students and tourists. They can now withdraw upto $5,000 worth of Indian rupees in cash as foreign travel allowance.
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