Local Currencies in Focus: RBI-Indonesia Agreement

The Reserve Bank of India (RBI) and the Bank of Indonesia (BI) have signed a Memorandum of Understanding (MoU) on March 7, 2024, to establish a framework for cooperation in the area of cross-border transactions in local currencies . This is India’s second such agreement after the UAE, and aims to facilitate trade and investment between the two countries by reducing transaction costs and risks.

Benefits of the MoU

The MoU enables exporters and importers to invoice and pay in their respective domestic currencies, i.e., Indian rupee (INR) and Indonesian rupiah (IDR), without involving a third currency. This will help optimize the costs and settlement time for transactions, as well as hedge against exchange rate fluctuations. The MoU will also enhance the bilateral trade and economic relations between India and Indonesia, which are among the largest economies in Asia. According to the RBI, the bilateral trade between India and Indonesia stood at USD 16.6 billion in 2020-21. According to the Observatory of Economic Complexity, India’s main exports to Indonesia in 2022 were refined petroleum ($3.67 billion), raw sugar ($736.64 million), and vehicles ($664.15 million), while Indonesia’s main exports to India were coal briquettes ($4.58 billion), palm oil ($3.45 billion), and ferroalloys ($495 million).

Challenges and Opportunities

The MoU is a positive step towards strengthening the regional financial integration and stability in Asia. However, there are some challenges that need to be addressed for its effective implementation. For instance, there is a need to develop the market infrastructure and liquidity for local currency transactions, as well as harmonize the regulatory and legal frameworks across the two countries. Moreover, there is a scope to expand the scope of the MoU to include other areas of cooperation, such as financial inclusion, digital payments, fintech, green finance, etc.

Conclusion

The MoU signed by RBI and BI is a significant milestone in promoting the use of local currencies for cross-border transactions. It will benefit both the countries by reducing transaction costs and risks, enhancing trade and economic ties, and supporting regional financial integration and stability. The MoU also opens up new opportunities for further collaboration in the financial sector between India and Indonesia.

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