The Ministry of External Affairs declared that trade between India and Malaysia can now be conducted using the Indian Rupee (INR) as a mode of settlement, in addition to other currencies. This announcement follows the launch of the Foreign Trade Policy (FTP) 2023 by the Ministry of Commerce the day before, which reaffirmed the government’s determination to establish the rupee as a global currency. This move is expected to boost bilateral trade between the two countries and reduce transaction costs for businesses.
Significance of India, Malaysia Trade in Indian rupee:
The decision to trade in local currencies is part of a broader trend towards currency swap agreements between countries. These agreements are aimed at reducing reliance on the US dollar as the dominant currency for international trade and finance. The use of local currencies can also help reduce currency risk for businesses and encourage greater economic integration between countries.
For India and Malaysia, the move to trade in local currencies is particularly significant. The two countries have a long history of trade and investment ties, and bilateral trade between the two countries has been growing steadily in recent years. However, much of this trade has been conducted in US dollars, which has created additional transaction costs and currency risk for businesses.
By allowing trade to be conducted in local currencies, India and Malaysia will be able to reduce these costs and encourage greater trade and investment between the two countries. This is particularly important for small and medium-sized enterprises (SMEs), which may not have the resources to manage currency risk effectively. By trading in local currencies, SMEs will be able to reduce their exposure to currency fluctuations and focus on growing their businesses.
Need of the India, Malaysia Trade in Indian rupee:
The agreement between India and Malaysia is also a positive development for the broader region. Both countries are important players in Southeast Asia and South Asia, respectively, and the agreement is likely to encourage other countries in the region to explore similar arrangements. This could help to strengthen economic ties between countries in the region and reduce reliance on the US dollar for international trade and finance.
What are the concerns regarding use of local currencies:
However, there are also some potential risks associated with trading in local currencies. One concern is that it could lead to greater volatility in exchange rates, particularly if one currency experiences significant fluctuations in value. This could create additional risk for businesses and potentially undermine the benefits of trading in local currencies.
Another potential risk is that trading in local currencies could create additional complexity and administrative burden for businesses. This could be particularly challenging for SMEs, which may not have the resources to manage the additional paperwork and compliance requirements associated with trading in local currencies.
India, Malaysia Trade in Indian rupee: In Conclusion:
Overall, the agreement between India and Malaysia to trade in local currencies is a positive development for both countries and the broader region. It has the potential to reduce transaction costs and currency risk for businesses, encourage greater economic integration between countries, and reduce reliance on the US dollar for international trade and finance. However, it is important to monitor the potential risks associated with trading in local currencies and take steps to mitigate them as necessary.
india-malaysia-can-now-trade-in-indian-rupee with a Vostro Account
A Vostro account is an account held by a domestic bank on behalf of a foreign bank in the domestic currency, in this case, the rupee. Domestic banks use these accounts to offer international banking services to their clients who have global banking needs.
The domestic bank that holds the Vostro account acts as a custodian for the funds of the foreign bank. It provides a range of services, including currency conversion, payment processing, and account reconciliation, to facilitate the foreign bank’s operations and transactions in the domestic market. The Vostro account enables the foreign bank to access and utilize domestic banking services through its relationship with the domestic bank.
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