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India looking at currency swap option to help exporters as Sri Lanka plunges into forex crisis

India, Sri Lanka looking at a currency swap mechanism (Pic: Twitter)

With the deepening of Sri Lanka’s foreign exchange crisis, India could look at coming out with a currency swap mechanism to keep bilateral trade and investments going. According to sources, the Reserve Bank of India (RBI) has already held discussions on such an arrangement. The arrangement would come as a “big relief” to Indian exporters.

The mechanism could entail a swap of a particular amount of money pegged with the US dollar.  For example, if the swap mechanism is decided for a sum of $100 million, then the RBI will provide Indian rupees to Colombo that is equivalent to the said amount while it will receive Sri Lankan currency in lieu of it.

The arrangement will allow Indian exporters to continue supplying goods to the island nation as they would get paid in rupee. Indian importers sourcing goods from Colombo, on the other hand, will make the payment in Sri Lankan currency. Now, considering at the end of a specified period of the arrangement, India has Sri Lankan currency left with it, the Indian investors can use that for investing in the island nation.

Also read: Sri Lanka's forex reserves drop to a new low, just enough to handle imports for a month

“This will help both countries continue with the required trade and investments even as Sri Lanka’s forex reserves are depleting,” a person familiar with the development told India Narrative.

India is Sri Lanka’s second largest trading partner after China.

Sri Lanka’s foreign exchange reserves further dropped to $1,587 million in November 2021 – the lowest since May 2009. In October, Sri Lanka’s forex reserves stood at $2,269.2 million recorded in October. The country’s forex reserves are just enough to cater to a month’s imports.

The crisis has also prompted Colombo to offer incentives to Sri Lankans living overseas to expand their remittances. The country’s central bank said on December 1 that it “has decided to pay an incentive of Rs. 8.00 per US dollar for workers’ remittances, in addition to the existing incentive of Rs.2.00” under the “Incentive Scheme on Inward Workers’ Remittances.”

Earlier, Sri Lankan President Gotabaya Rajapaksa declared a state of emergency after sharp fall in its currency and surge in food prices, triggered by a near erosion of foreign exchange reserves.