Malaysia and India Strengthen Bilateral Trade with Local Currency Settlement Framework

Developing a Framework for Enhanced Trade

The investment, trade and industry ministry has announced that it is fine-tuning a proposal from the Reserve Bank of India (RBI) to develop a Local Currency Settlement Framework to enhance the use of the ringgit and rupee in bilateral trade. This development is expected to support and strengthen bilateral trade growth between Malaysia and India, while also expanding opportunities for entrepreneurs and investors in both countries.

Positive Impact on Trade

The ministry explained that trade in the rupee could potentially have a positive impact on trade between the two countries due to the reduction in dependency on the US dollar. “This could directly reduce foreign currency transaction costs, which would in turn lead to more competitive pricing of goods,” said the ministry in response to a question from A Kesavadas Nair on whether trade in the rupee would reduce the cost and price of goods.

Increase in Bilateral Trade

Quoting BNM data, the ministry said bilateral trade in goods and services settled in ringgit and rupee increased from 4.4% in 2022 to 4.8% in 2023. This indicates a growing trend of trade settlement in local currencies, which is expected to continue with the implementation of the Local Currency Settlement Framework.

RBI’s Initiatives

The RBI issued a circular on July 11, 2022 requiring Indian banks to provide mechanisms for invoicing, payments, and settlement of trade in the rupee. “Aligning with the RBI initiative, BNM informed that trade between Malaysia and India can be settled in rupees, and the India International Bank Malaysia is the first bank in Malaysia to implement this mechanism through the opening of a Special Rupee Vostro Account with Union Bank of India,” said the ministry.

Facilitating Trade Settlement

Indian companies are encouraged to conduct transactions in ringgit through overseas offices appointed by BNM in India. This facilitates the settlement of trade in local currencies, reducing the need for foreign exchange conversions and associated costs.

Conclusion

The development of a Local Currency Settlement Framework is expected to enhance the use of the ringgit and rupee in bilateral trade between Malaysia and India, supporting trade growth and reducing costs. This initiative is expected to benefit entrepreneurs and investors in both countries, facilitating trade and economic cooperation between the two nations.

FAQs

Q: What is the purpose of the Local Currency Settlement Framework?
A: The purpose of the framework is to enhance the use of the ringgit and rupee in bilateral trade between Malaysia and India, supporting trade growth and reducing costs.

Q: How will trade settlement be facilitated?
A: Trade settlement will be facilitated through the use of local currencies, reducing the need for foreign exchange conversions and associated costs.

Q: Which bank is the first to implement the Special Rupee Vostro Account?
A: The India International Bank Malaysia is the first bank in Malaysia to implement the Special Rupee Vostro Account with Union Bank of India.

Q: What is the increase in bilateral trade in goods and services settled in ringgit and rupee?
A: The increase in bilateral trade in goods and services settled in ringgit and rupee is from 4.4% in 2022 to 4.8% in 2023.