India and Sri Lanka Move to Expand Direct Currency Trade to Reduce Reliance on US Dollar

India and Sri Lanka are intensifying efforts to broaden a bilateral trade settlement mechanism that would allow transactions to be conducted directly in their respective national currencies, moving away from the long-standing dependence on the US dollar as an intermediary.

What the Initiative Involves

The two neighbouring nations are pushing to expand a rupee-to-rupee trade settlement framework, under which Indian and Sri Lankan businesses would be able to settle import and export payments using the Indian Rupee and the Sri Lankan Rupee respectively, without first converting funds into US dollars.

The arrangement is designed to streamline cross-border commerce, lower transaction costs associated with currency conversion, and reduce the exposure of both economies to fluctuations in the US dollar exchange rate.

Why This Matters for Sri Lanka

For Sri Lanka, which experienced a devastating foreign exchange crisis in 2022 that led to critical shortages of fuel, medicine and essential goods, reducing dollar dependency carries particular significance. The island nation has since been working to stabilise its economy and rebuild its foreign reserves, and any mechanism that reduces the outflow of hard currency in routine trade transactions offers meaningful relief.

Trade with India is among Sri Lanka's most significant economic relationships. India consistently ranks as one of Sri Lanka's largest import partners, making a direct currency settlement channel between the two countries potentially impactful in practical terms.

A Broader Regional Trend

The push between Colombo and New Delhi forms part of a wider regional and global conversation around de-dollarisation. India has been actively promoting the use of the Indian Rupee in international trade with multiple partner countries, framing it as both an economic and strategic priority.

Settling trade in local currencies eliminates the need for both parties to hold and convert US dollars for every transaction, which can be particularly burdensome for smaller economies managing tight foreign exchange reserves.

Next Steps

While the framework is being advanced at a governmental level, successful implementation will depend on cooperation between the central banks of both countries — the Reserve Bank of India and the Central Bank of Sri Lanka — as well as the participation of commercial banks and businesses engaged in bilateral trade.

Officials from both sides are expected to continue discussions on the technical and regulatory arrangements needed to make the expanded settlement system fully operational, with the shared goal of making India-Sri Lanka trade faster, cheaper, and more financially resilient.

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