Making the Indian rupee (INR) a designated foreign currency will not only facilitate trade settlement between the two countries in Indian rupees but will also be a major advantage for Indian tourists coming to Sri Lanka as they can use INR for transactions.
Sri Lanka will become the third nation, after Nepal and Bhutan, where INR can be used freely, although not as legal tender. Sri Lankan citizens can now hold INR equivalent to USD 10,000 in physical form.
Sri Lanka has already notified that the Indian rupee is a designated foreign currency in their system, Indian External Affairs Ministry Spokesperson Arindam Bagchi said in India recently.
Founder and Executive Chairman, Ideal Group, Nalin Welgama said that since India remains a largest source country for tourism in Sri Lanka, authorising INR as a designated foreign currency will add more convenience to Indian tourists.
Indian tourists will soon avail themselves of the Unified Payments Interface (UPI) enabled mobile phone app facility when visiting Sri Lanka. “This no doubt will help SL to generate INR revenue due to the convenience it permits for Indian tourists.”
UPI is a system that allows money transfers through mobile devices and benefits are that it’s fast, hassle free and low cost.
“It enables real time and anytime money transfers and also allows access to multiple bank accounts, through a single mobile application,” he said.
“The UPI-enabled mobile application permits users to make UPI payments using their bank accounts, debit card and now some selected credit cards. In Sri Lanka, LankaPay is coordinating this initiative.
Welgama said that this will reduce additional transaction costs associated with the dual conversion of INR to USD and thereafter to LKR and vice versa.
This also means that Sri Lankans and Indians can use INR instead of USD for settlement of international transactions with each other.
Since July 2022, the Indian Government has been looking to bring countries that are short on $ into its rupee settlements mechanism. Special Rupee accounts for international transactions between designated countries are called “Vostro” accounts.
“INR being a designated currency in SL will provide the country with much needed liquidity support to help it tide over its economic crisis amidst inadequate availability of the USD.
“However, it was reported recently that our local banks have seen a reduction in import settlements in INR in the last few months as Indian exporters prefer to invoice their export bills in US dollars rather than in INR,” Welgama said.
The reason for the downward trend is because the INR denominated exports from India do not attract the export credit offered of around 2% of bill value.
“Therefore, it’s highly unlikely that a correction will take place until this anomaly is fully resolved,” he said.