RBI approves India, Sri Lanka trade settlement in rupee outside ACU

Regulatory nod only for State Bank of India's term loan of $1 billion for island nation battling economic crisis.

The Reserve Bank of India (RBI) has approved trade transactions between India and Sri Lanka to be settled in Indian rupee outside the Asian Clearing Mechanism.

The approval is alongside a government-guaranteed $1 billion term loan from State Bank of India (SBI) to the Sri Lankan government for purchasing essential goods from India.

India, On March 17, announced a term-loan facility for Sri Lanka as a part of its financial assistance to help the country to deal with its worst financial crisis in modern times.

“In view of the difficulties being experienced by exporters in receipt of export proceeds from Sri Lanka and State Bank of India’s credit facility agreement dated March 17, 2022 with the Government of Sri Lanka for sanction of Government of India guaranteed USD 1000 million term loan to the latter for financing purchase of essential goods by Sri Lanka from India, it has been decided that such trade transactions with Sri Lanka, falling under the said arrangement, may be settled in INR outside the ACU mechanism,” RBI said in a notification.

The Asian Clearing Union (ACU) was established in 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) for promoting regional cooperation. The clearing union facilitates payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries.

The RBI said in a circular that under the arrangement, financing of export of eligible goods and services from India would be allowed subject to their being eligible for export under the Foreign Trade Policy of the Government of India and whose purchase may be agreed to be financed by SBI under this agreement.

On Thursday, Sri Lanka defaulted on debt payment obligation for the first time in history as the grace period to repay $78 million of debt interest payment expired.