India, Sri Lanka collaborate to strengthen trade interactions through local currency settlement initiatives

A bilateral roundtable on local currency settlement (LCS) was held in Colombo on June 16, 2026, organized by the Indian High Commission, bringing together se...

What Happened

A bilateral roundtable on local currency settlement (LCS) was held in Colombo on June 16, 2026, organized by the Indian High Commission, bringing together senior government, banking, and business representatives from both countries.
State Bank of India (SBI) and Indian Bank presented operational frameworks for Indian Rupee (INR) to Sri Lankan Rupee (LKR) trade settlements, including the extension of INR-denominated loans to Sri Lankan importers purchasing Indian goods.
Indian banks operating in Colombo can now extend rupee-denominated credit to Sri Lankan importers, eliminating the need for dollar intermediation in these transactions.
Both sides agreed to operationalize UPI-based digital payments to further deepen trade and transaction flows.
The initiative builds on the May 2022 RBI approval for India-Sri Lanka trade settlement in Indian rupee outside the Asian Clearing Union (ACU) mechanism — itself triggered by Sri Lanka's 2022 foreign exchange crisis.

Static Topic Bridges

RBI's Indian Rupee Internationalization Framework (2022)

On July 11, 2022, the Reserve Bank of India issued A.P. (DIR Series) Circular No. 10 establishing a framework for International Trade Settlement in Indian Rupees (INR). The mechanism allows authorized dealer (AD) banks in India to open Special Rupee Vostro Accounts (SRVAs) for correspondent banks of partner trading countries. All exports and imports under the arrangement may be denominated, invoiced, and settled in INR.

Circular issued: July 11, 2022 (RBI/2022-23/90)
Key mechanism: Special Rupee Vostro Account (SRVA) — a rupee-denominated account held by a foreign bank at an Indian bank
Countries using SRVAs for trade settlement: Over 20 countries, including Russia, Sri Lanka, UAE, and several African nations (as of 2024)
Purpose: Reduce dollar dependency, grow India's export basket, ease bilateral trade during sanctions regimes
India-Sri Lanka specific approval: May 2022, outside ACU — aligned with the $1 billion SBI credit line to the Sri Lankan government

Connection to this news: The June 2026 roundtable and SBI's rupee-denominated loan product for Sri Lankan importers are the operational implementation of the 2022 RBI circular — converting the policy framework into bankable products on the ground.

Asian Clearing Union (ACU) and De-Dollarization in Regional Trade

The Asian Clearing Union (ACU) was established in 1974 under the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) to facilitate multilateral clearing of trade payments among member central banks, reducing the use of convertible foreign exchange. Settlement is done every two months. India and Sri Lanka have historically settled bilateral trade through the ACU mechanism using the ACU Dollar (ACUD) as the unit of account.

ACU established: 1974
Under: UNESCAP
Members (9): Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan, Sri Lanka
Unit of account: ACU Dollar (ACUD) — equivalent to USD 1
Clearing cycle: Bimonthly
India's 2022 decision: RBI permitted India-Sri Lanka INR settlement outside the ACU for the first time, bypassing dollar-equivalent accounting

Connection to this news: The new LCS mechanism supersedes the ACU route for India-Sri Lanka trade, allowing direct INR-LKR exchange — more efficient, lower cost, and insulated from dollar volatility and sanctions risk.

India's Bilateral Trade with Sri Lanka

India is Sri Lanka's largest trading partner. Bilateral trade stands at over $6 billion annually, with India running a substantial surplus (India exports engineering goods, petroleum products, pharmaceuticals, food items; Sri Lanka exports tea, spices, textiles, rubber). The 2022 economic crisis in Sri Lanka (triggered by foreign exchange exhaustion) created urgency for mechanisms that conserve hard currency, making the rupee settlement framework strategically valuable for Colombo.

Bilateral trade volume: Over $6 billion annually
India's main exports to Sri Lanka: Petroleum products, vehicles, machinery, pharmaceuticals, wheat
Sri Lanka's main exports to India: Tea, coffee, spices, rubber articles, apparel
Sri Lanka's 2022 crisis: Foreign exchange reserves fell to near-zero; first sovereign default in independent history
India's emergency support during 2022 crisis: Over $4 billion in credit lines, currency swaps, and deferred payments

Connection to this news: Sri Lanka's dollar reserve constraints — acute during the 2022 crisis and still a structural vulnerability — make INR-denominated trade credit from Indian banks an economically rational choice, reducing LKR pressure on the CBSL (Central Bank of Sri Lanka).

Rupee Internationalisation and India's Broader Strategic Objectives

India's push to internationalize the rupee serves multiple strategic goals: reducing dependence on the US dollar in trade (particularly with countries under Western sanctions), lowering transaction costs for Indian exporters, building a rupee-denominated bond and deposit market, and increasing India's leverage as a financial hub. The India-Sri Lanka LCS is part of a wider pattern — India has signed similar arrangements with Russia (INR-Ruble), UAE (INR-AED), and is in discussions with several African and ASEAN nations.

India-Russia INR-Ruble trade: Activated post-2022 sanctions; India's largest use of the SRVA mechanism
India-UAE Local Currency Transaction arrangement: Signed February 2023 during PM Modi's visit to UAE
IMF's SDR basket (2022): Indian rupee is not yet included; China's RMB was included in 2016
RBI Internationalisation Roadmap: A five-year roadmap for phased rupee internationalisation was released in July 2023

Connection to this news: The India-Sri Lanka LCS deepens India's rupee internationalisation footprint in South Asia — the region where the rupee has the most natural commercial gravity and where USD dependency is most easily replaced.

Key Facts & Data

Roundtable on LCS: June 16, 2026, Colombo, organized by Indian High Commission
Banks involved: State Bank of India and Indian Bank (operational frameworks presented)
RBI framework for INR trade settlement: July 11, 2022 (Circular No. 10)
ACU established: 1974, 9 member nations including India and Sri Lanka
India-Sri Lanka bilateral trade: Over $6 billion annually; India is Sri Lanka's largest trading partner
India's 2022 emergency support to Sri Lanka: Over $4 billion
New mechanism: INR-denominated loans from Indian banks in Colombo to Sri Lankan importers
UPI-based digital payments to be operationalized for cross-border transactions
India-UAE LCS arrangement: February 2023