This note talks about the various liquidity (forex) facilities have been offered by India to Sri Lanka, viz., SAARC Swap facility, special currency swap agreement, deferment of ACU dues and LoC by Indian banks. It also highlights how it promoted the usage of rupee outside India. So it can also be analysed as an event promoting Internalisation of INR 1. **Special Currency Swap Agreement** 1. [Mar 29, 2016](RBI_Press%20Release_20160329_RBI%20signs%20Special%20Currency%20Swap%20Agreement%20with%20the%20Central%20Bank%20of%20Sri%20Lanka.pdf) - Before the crisis of 2022, RBI signed Special Currency Swap Agreement with the Central Bank of Sri Lanka. This special arrangement is in addition to the existing Framework on Currency Swap Arrangement for the [SAARC](SAARC%20Currency%20Swap%20Arrangement.md) Member Countries. 2. **Credit Facility by SBI** 1. March 17, 2022 - State Bank of India (SBI) had signed a credit facility agreement, for financing by State Bank of India of export/purchase of eligible goods and services (essential goods) from India by Sri Lanka with the help of Government of India guaranteed USD 1000 million term loan to Sri Lanka 2. Settlement of Trade in INR outside ACU 1. [May 19, 2022](RBI_Notification_20220519_Government%20of%20India%20guaranteed%20term%20loan%20extended%20by%20SBI%20to%20the%20Government%20of%20Sri%20Lanka-%20Settlement%20in%20INR.pdf) - RBI allowed to settle trade permitted under the arrangement of credit facility by SBI to Sri Lanka, in INR outside ACU mechanism 3. **INR as a Designated Foreign Currency in Sri Lanka** 1. In April 2022, Sri Lanka announced that it would suspend repayment on most of its foreign debt due to a severe shortage of foreign exchange reserves. This marked the country’s first sovereign default. 2. Although the IMF later agreed to a USD 2.9 billion bailout, it was conditional on successful debt restructuring. 3. To ease the crisis, **India extended several facilities** to Sri Lanka, including the [[SAARC Currency Swap Arrangement|SAARC Swap facility]], deferment of Asian Clearing Union [[Bilateral, Multilateral Swaps, LoC, Liquidity Arrangements#1. The Asian Clearing Union (ACU)|(ACU)]] dues, and Lines of Credit (LoCs) from Exim Bank. 4. For a country in such distress, one possible way to sustain essential imports despite foreign currency shortages is to settle trade in the local currency of its trading partner. 1. ==This arrangement not only supports the crisis-hit country but also helps the partner country (India) by promoting exports and expanding the international use of its currency.== 5. Accordingly, with effect from July 11, 2022, the RBI introduced an additional mechanism for settling international trade in Indian Rupees (INR). 6. Subsequently, in August 2022, Sri Lanka designated the INR as a foreign currency, allowing INR-based trade and settlements between the two countries. 7. **Mechanism:** 1. India allowed settlement of trade in Indian Rupees through Special Rupee Vostro Accounts (SRVAs). 2. Sri Lankan bank opens a Special Rupee Vostro Account (SRVA)** with an Indian bank. 1. Example: _People’s Bank (Sri Lanka)_ opens an INR account with _State Bank of India_. 2. Sri Lankan importer pays its local bank in Sri Lankan rupees (LKR). 3. That LKR is converted into INR by the Sri Lankan bank using its export earnings from India (if available) or via other rupee inflows or forex market. 4. The Indian exporter receives payment in INR from the Sri Lankan bank’s SRVA. 5. As the transaction settles entirely in rupees, no USD needed. 6. It helped Sri Lanka save scarce US dollars, promoted exports of India, increased internationalisation of INR. 7. To help Sri Lanka with their import payments, India also extended LoCs ## Other Agreements 1. **Supervisory Cooperation and Exchange of Supervisory Information** 1. [Jan 31, 2014](RBI_Press%20Release_20140131_RBI%20signs%20MoU%20on%20“Supervisory%20Cooperation%20and%20Exchange%20of%20Supervisory%20Information”%20with%20Central%20Bank%20of%20Sri%20Lanka.pdf) - RBI signs MoU on “Supervisory Cooperation and Exchange of Supervisory Information” with Central Bank of Sri Lanka 2. **Financial products and services** 1. [Feb 12, 2024](RBI_Press%20Release_20240212_India’s%20RuPay%20:%20UPI%20connectivity%20with%20Mauritius%20and%20Sri%20Lanka.pdf) - India’s RuPay / UPI connectivity with Mauritius and Sri Lanka ## Related Notes 1. [Link](Bilateral,%20Multilateral%20Swaps,%20LoC,%20Liquidity%20Arrangements.md#Related%20Notes) ## References 1. RBI. FAQ on [International Trade Settlement in Indian Rupees (INR)](https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=3373) 2. Press releases related to various initiatives by RBI for Sri Lanka