Tuesday, January 31, 2023

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Sri Lankans allow to hold US $10,000 worth of the Indian rupee (INR)

Sri Lankans have been allowed to hold US $10,000 worth of the Indian rupee (INR) in a physical form, though the INR would not be legal tender in Sri Lanka, after India approved a Sri Lankan request to designate the INR as the foreign currency.

This will provide the Sri Lanka much needed liquidity support to help it tide over its economic crisis amid inadequate dollar liquidity.

The decision is also in accordance with the Indian government’s efforts to popularize the Indian Rupee among Asian nations and reduce dollar dependence.

 Sri Lankan residents will now be able to convert the INR into another currency and to enable this, Sri Lankan banks must sign an agreement with an Indian bank to open “INR nostro accounts” which means the accounts that banks hold in a foreign currency in another bank.

Another important development is that offshore banking units (OBU) of Lankan banks have been permitted to accept savings, time and demand deposits from non-residents.

According to the media reports, all current account transactions including exports, imports, and remittances can be undertaken between Lankan residents and non-residents. 

Transactions between Sri Lankans can only be done through banking channels and only for permitted activities, bankers said. While this arrangement was approved by India a few months ago, the Central Bank of Sri Lanka was yet to notify the rupee as a designated foreign currency.

Speculations are rife that the Sri Lankan Rupee (LKR) will be substituted with the INR in certain segments of the economy, 

Nandalal Weerasinghe, the Governor of Sri Lanka’s Central Bank recently , said that the country’s economy is likely to contract by over six per cent this year —  worse than in the pandemic-affected 2020, when the economy shrank 3.5 per cent.

The currency swap has the potential to draw foreign investors who will be attracted by the stability of a substitute currency and show greater willingness to be paid in INR rather than the domestic currency LKR, which might be subject to losses on foreign exchange markets. 

Further, with a foreign currency, the economy is unlikely to face a balance of payments crisis when speculators take flight and sell domestic currency.

Bhutan and Nepal are using INR mainly because most of the goods in their respective countries come from India and therefore it makes sense to pay for these products in INR because they had already been priced in INR terms. 

A leading Economist said that the partial substitution may not change ‘anything much ‘but  if Sri Lanka were to substitute the LKR with the INR or any other foreign currency, it would probably mean that part of Sri Lanka’s national sovereignty would no longer be in its control.

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