Expanded economic links between Sri Lanka would present opportunities to use the Indian rupee for trade Parameswaran Iyer, chief executive, NITI Aayog, India’s National Institution for Transforming India told a policy forum in Colombo.
India’s development assistance to Sri Lanka was about 5 billion US dollars, foreign direct investment was 2.2 billion US dollars and bilateral trade was 5.45 billion US dollars in 2021 told a policy forum organized by Sri Lanka’s Ceylon Chamber of Commerce.
“Using the Indian currency for trade” would be one of the next steps in expanding economic links with Sri Lanka, Iver said.
During Sri Lanka’s latest currency crisis India had given up to 3.8 billion US dollars in import credits, swaps and Asian Clearing Union deferrals, he said.
An import credit denominated in a billion US dollars is being settled in rupees.
Meanwhile the Reserve Bank of India has also encouraged banks in other countries including Sri Lanka to open what are called VOSTRO accounts to settle transactions.
The Indian rupee was the ‘dollar of South Asia’ until the Reserve Bank of India was nationalized and state economists started to print money, destroying its value and triggering exchange and trade controls.
The Sri Lanka rupee and most currencies in South Asia originate from the Indian rupee when it was restrained by a silver peg, later shifted to gold, before macro-economists got the power to print money at will with the retreat of classical economics in the face of Keynesianism.
Sri Lanka had a one-to-one currency board with the Indian rupee until 1950.
India’s New India Express said the country was in talks with UAE and Saudi to use Indian rupee.
Ironically before macro-economists got hold of the rupee, Indian currency was the official currency in use in present day UAE which was part of what was called the Trucial States, which were under British protection as well as Bahrain, Oman and Qatar.
As the Indian rupee got into trouble after independence the country started a new currency called the Gulf Rupee.
However Middle Eastern territories set up currency-board-like Monetary Authorities with British support and dumped the Indian currency. A large number of Indians now work in the former British protectorates which have mostly fixed exchange rates with the US dollar.
Most third world central banks which print money actively discourage and criminalize the use of their currencies abroad, placing restrictions on carrying notes outside, citing ‘monetary policy’ concerns.
However the Indian rupee is unofficially used to settle transactions with Sri Lankans travelling to India also take rupee notes, which are available in the kerb market.
Indian rupees are also available on the kerb market in a number of countries.
Users of Indian rupee was penalized when India demonitized large notes in an own-goal a few years ago, according to critics.
( source Economynext)