India-Indonesia MoU: Promoting use of Local Currencies for Bilateral Transactions

In recent years, there has been an increase in the adoption of local currencies for settling bilateral trade and investment transactions. India has been actively pursuing its efforts for internationalization of its currency, the Indian Rupee (INR), through various bilateral agreements along with other means like special Vostro Rupee Accounts and currency swap agreements. This effort has gained importance since the time India adopted ‘Look East Policy’ in 1991, resulting in significant advancements in bilateral relations.

RBI’s press release of India-Indonesia MoU for use of local currencies

Recently, the Reserve Bank of India (RBI) announced on March 7th, 2024, the signing of a Memorandum of Understanding (MoU) with Bank Indonesia. The agreement aims to promote direct cross-border transactions between businesses using local currencies, thereby preventing intermediaries in the process. This initiative leads to reduced transaction costs, settlement times, and facilitate accurate and precise business planning while enabling exporters and importers to invoice and pay in their respective domestic currencies.

The MoU ensures the use of INR and IDR bilaterally covering a range of economic and financial transactions, including current account and permissible capital account transactions. By enabling direct transactions, the move seeks to enhance economic stability by minimizing currency fluctuations and mitigating exchange rate volatility.

As a whole, the shift towards promoting bilateral transactions in local currencies is aimed at diversifying businesses foreign exchange holdings that underscore the nation’s commitment to strengthening economic cooperation by building resilience in times of global uncertainty.

BRICS and ASEAN Endorsement of Local Currency Use

During 2023 Association of Southeast Asian Nations (BRICS) Summit, the member nations collectively endorsed the use of local currencies to promote and strengthen economic ties. While India is a BRICS member, Indonesia, during the August 2023 summit held in South Africa, opted for autonomy instead of BRICS membership.

Meanwhile, the Association of Southeast Asian Nations (ASEAN) Summit in May 2023, held in Indonesia, emphasized promoting regional connectivity and transactions in local currencies. Despite India not being a member of ASEAN, it actively engages with ASEAN countries on a bilateral basis.

Therefore, the move of signing the MoU between India-Indonesia in 2024 is anticipated to improve India-ASEAN relations while fostering historical, cultural, and economic ties.