Challenging dollar hegemony, Sri Lanka to trade with Russia in INR

Sri Lanka is also mulling to trade with countries like Tajikistan, Cuba, Luxembourg and Sudan in Indian rupee. Being a leading economy in the world, India is offering the much-needed respite to the countries that are short of US dollars.

New Delhi, Dec 21: Although this is being done in the most amicable manner, and India has clearly admitted that acceptance of Indian rupee (INR) is merely to help out the nations falling short of US dollar, it is definitely a challenge to the hegemony of US dollar (USD) for over a century. Now, the latest entrant into the 'INR club' is Sri Lanka which has agreed to use INR for international trade, especially with Russia.

In addition to Russia, Sri Lanka is also mulling a plan to trade with countries like Tajikistan, Cuba, Luxembourg and Sudan in INR. India being a leading economy in the world is offering the much needed respite to the countries that are short of USDs. These nations are facing difficulties in their trade settlements and to help them India has decided to support the INR.

The latest mechanism is all set to help exports and imports from Sri Lanka as they would now be denominated and invoiced in the INR. The India government has already asked the Indian Banks' Association and the FIEO to initiate an awareness campaign to educate stakeholders in the region on the benefits from the INR trade settlement mechanism.

INR trade settlement mechanism

Although the strengthening of the dollar is a great economic indicator for the US, it has caused a lot of financial issues in developing economies that use USD for trade settlement. Not just that USD hegemony impacts the global economy and makes it highly susceptible to swings in US monetary policy but also increases the trade deficits several countries face.

In fact, the US monetary policy shapes and impacts more than 70% of the world economy as most of the trades are done in the USD. Higher dependence on just one currency could be avoided with the help of a few more currencies being accepted for trade settlement. INR is one such currency that could fulfil the requirement and facilitate international trade without any disruption.

INR an international currency now

Earlier this year, the Indian government announced that it is willing to help the countries that are falling short of USD in their trade settlements. The latest entry of Sri Lanka in INR being acceptable currency for international trade will help not just them trade but popularise and increase the acceptance of INR.

Nevertheless, once INR becomes an international currency, it would also help India reduce its trade deficit. Additionally, India's stature in the global comity will go up as well. To trade in INR, Sri Lankan banks have opened a special rupee trading account - Special Vostro Rupee Account (SVRA). Now, Sri Lankans could hold USD 10,000 in INR which is more than Rs 8 lakh in physical form!