RUPEE-RUFIYAA TRADE - ECONOMY

Rupee-Rufiyaa trade - ECONOMY

NEWS: The Memorandum of Understanding (MoU) recently signed between the Reserve Bank of India (RBI) and the Maldives Monetary Authority (MMA).

WHAT’S IN THE NEWS?

Overview of the MoU

  • Purpose: The MoU aims to facilitate bilateral trade settlements between India and the Maldives using local currencies—Indian Rupee (INR) and Maldivian Rufiyaa (MVR).
  • Significance: This move enhances bilateral economic relations and reduces reliance on third-party currencies, primarily the US Dollar.

Key Benefits of the INR-MVR Trade Settlement Framework

  1. Reduction in Transaction Costs

·         Elimination of Third-Party Currency: Shifts away from conversion through US Dollars, minimizing forex costs.

·         Support for SMEs: Reduction in conversion expenses particularly benefits Small and Medium Enterprises (SMEs), which often operate with limited financial margins.

  1. Enhancement of Trade Efficiency

·         Faster Settlement: Direct trade in INR and MVR reduces settlement times, expediting payments for exporters and importers.

·         Operational Streamlining: Simplifies financial operations for businesses by avoiding complex currency conversion processes.

  1. Strengthening Bilateral Trade Stability

·         Mitigation of Currency Fluctuation Risks: Shields businesses from global currency volatility, providing a stable trading environment.

·         Alignment with India's Strategy: Supports India's objective of internationalizing the Rupee and deepening economic ties within the region.

  1. Boosting Local Currency Markets

·         Strengthening of INR and MVR: Promotes trading of both currencies within the foreign exchange market, fostering economic sovereignty.

·         Encouragement for Regional Economic Growth: Enhances the status of local currencies, which may encourage greater economic cooperation.

  1. Supporting Regional Economic Integration

·         ‘Neighbourhood First’ Policy: This initiative underscores India's focus on fostering regional partnerships.

·         Collaborative Growth: Sets the stage for mutual economic advancement and regional stability.

Challenges in Implementing the Framework

  1. Currency Volatility

·         Need for Hedging Mechanisms: Both nations require robust financial tools to manage volatility in the INR and MVR exchange rates.

·         Risk Mitigation: Ensuring stability will be crucial to attract businesses to the local currency trading system.

  1. Liquidity Constraints

·         Insufficient Liquidity: The current INR-MVR trading pair lacks adequate liquidity.

·         Market Development: Coordinated efforts from financial institutions and private sector engagement are necessary to develop a mature market.

  1. Regulatory and Operational Complexities

·         Regulatory Alignment: Harmonizing regulatory frameworks for invoicing, settlements, and dispute resolution is vital.

·         Operational Challenges: Integration requires careful management to avoid disruptions during the transition phase.

  1. Resistance to Change

·         Preference for US Dollars: Businesses accustomed to dollar-based trade may initially resist shifting to INR-MVR due to perceived risks.

·         Awareness Initiatives: Targeted campaigns and incentives will be critical to encourage early adoption and build confidence.

  1. Dependence on Economic Stability

·         Macroeconomic Stability: Success hinges on maintaining stable economic conditions in both countries.

·         Maldivian Vulnerabilities: The Maldives’ reliance on imports and tourism-based foreign exchange inflows makes it sensitive to global fluctuations.

·         Potential Economic Buffer: This framework could offer stability against global shocks and help preserve forex reserves.

Broader Implications and Future Potential

  1. Enhancing India’s Influence in South Asia

·         Regional Currency Role: Provides India with an opportunity to promote the Indian Rupee as a regional currency.

·         Showcase of Regional Leadership: Successful implementation can set a precedent for similar agreements with other neighbouring countries.

  1. Integration with Regional Bodies

·         SAARC and IORA Platforms: Both India and the Maldives are members of SAARC and IORA, providing platforms to expand such initiatives.

·         Model for Future Agreements: A successful INR-MVR framework can serve as a blueprint for further regional economic integration.

  1. Opportunities for Further Trade Expansion

·         Diverse Export-Import Portfolio: India's exports to the Maldives include food, pharmaceuticals, and construction materials, while the Maldives’ major exports are fish and tourism services.

·         Long-term Trade Benefits: Facilitating trade in local currencies can lead to sustained trade growth and reduced dependency on global financial shifts.