India Maldives to settle cross border transaction in local currency

India and the Maldives have signed a Memorandum of Understanding (MoU) to settle their cross-border transactions in their local currency. Normally, these transactions were settled in US dollars, but now an effort will be made to settle them in Indian Rupees and the Maldivian Rufiyaa. 

MoU between RBI and Maldives Monetary Authority 

The MoU to settle cross-border transactions in local currency was signed between the Indian central bank, the Reserve Bank of India, and the Maldives Monetary Authority in Mumbai on 21 November 2024.

The MoU was signed by RBI Governor Shaktikanta Das and the visiting Governor of the Maldives Monetary Authority, Ahmed Munawar.

Feature of the MoU

The local currency of both countries will be used to settle :

• current account transactions, 
• permissible capital account transactions and 
• any other economic and financial transactions mentioned by the two governments.

The MoU will facilitate the invoicing and settlement of imports and exports between the two countries using their respective local currencies.

Invoicing means that when an Indian sells his goods and services to a Maldivian, the price of the goods and services sold will be quoted in Indian rupees. Similarly, a Maldivian exporting goods to India will quote the price in Maldivian currency.

The settlement will also be done in the respective currency. Settlement means the buyer pays an agreed amount to the seller, as mentioned in the invoice. So, the Indian importing goods from the Maldives will pay the Maldivian in the local currency of the Maldives, and the Maldivian buying goods and services from India will pay in Indian Rupees.

Benefit of the MoU

• Earlier, the payment was made in US dollars, and both countries had to keep a reserve of US dollars to import goods and services. Now, there will be no need to keep a reserve of US dollars.
• The fluctuation in the value of the US dollar adversely affected the payment capacity of the Indian or Maldivian importer.
• Using the local currency in the settlement will reduce the cost of transactions and settlement time.
• It will also help in the development of trading in the Indian Rupees and the  Maldivian Rufiyaa currency pair in the foreign exchange market.

What is Current Account transaction, Capital Account Transaction 

Current Account and Capital account transactions are part of a country’s Balance of Payment.

Balance of Payment is an accounting term that refers to the economic transaction between a country's residents and non-residents during an accounting period.

Here, economic transaction means the exchange of goods and services (import or export) and financial assets(capital).

Current account transactions include the import and export of goods and services (invisible) and transfer payments. Transfer payment includes grants provided by a foreigner to India and vice versa.

Capital account transactions refer to the transfer of capital to and from the country. They include foreign investment and foreign borrowings, investment made by resident Indians in foreign countries, and loans given by India to foreigners.

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