RBI Partners with Bank Indonesia to Boost Local Currency Use

RBI and Bank Indonesia MoU: Promoting Local Currencies

The Reserve Bank of India (RBI) has recently signed a Memorandum of Understanding (MoU) with Bank Indonesia to enhance the use of local currencies—Indian Rupee (INR) and Indonesian Rupiah (IDR)—for cross-border transactions. This agreement, signed on March 7, 2024, by RBI Governor Shaktikanta Das and Bank Indonesia Governor Perry Warjiyo, aims to streamline financial operations between India and Indonesia.

Key Points of the MoU

• Promotion of Local Currencies: The MoU focuses on utilizing INR and IDR in bilateral transactions to lessen dependence on third-party currencies.
• Scope of Transactions: It covers all permissible capital account transactions and other economic dealings mutually agreed upon by both nations.
• Benefits for Trade: Employing domestic currencies is expected to lower costs and shorten settlement times for exporters and importers, facilitating smoother trade.
• Development of Forex Market: This initiative is set to create an INR-IDR foreign exchange market, supporting trade and investment flows.

Strategic Importance

This MoU is part of the RBI’s broader strategy to promote the international use of the INR, evidenced by similar agreements with other countries. A notable example is an MoU with the Central Bank of the UAE signed in July 2023, aimed at promoting local currency usage and linking payment systems.

Comparative Analysis

The agreement with Bank Indonesia mirrors previous arrangements made by the RBI with various countries. These initiatives aim to enhance the INR's global standing, simplify cross-border transactions, and mitigate exchange rate risks. Such agreements are part of a trend where nations prefer to facilitate trade and financial transactions in their national currencies instead of relying on major currencies like the USD.

Implications for Civil Services Examination

For civil services aspirants, understanding the significance of such MoUs in the context of international finance and trade relations is vital. This agreement underscores India's proactive approach to strengthening global economic ties and promoting the INR in international transactions. Aspirants should evaluate the economic, geopolitical, and financial implications of these agreements, along with their impact on bilateral relations and the global financial landscape.

Frequently Asked Questions (FAQs)

Q1. What is the purpose of the RBI and Bank Indonesia MoU?
Answer: The MoU aims to promote the use of Indian Rupee (INR) and Indonesian Rupiah (IDR) for cross-border transactions, reducing reliance on third-party currencies and enhancing trade efficiency.

Q2. How does the MoU benefit trade between India and Indonesia?
Answer: By using local currencies, the MoU is expected to lower transaction costs and settlement times for exporters and importers, facilitating smoother trade operations.

Q3. What is the broader strategy behind the RBI’s MoUs with other countries?
Answer: The RBI aims to enhance the international use of the INR, reduce exchange rate risks, and simplify cross-border transactions, aligning with global economic trends.

Q4. Why is promoting local currencies important for countries?
Answer: Promoting local currencies helps countries reduce dependency on major global currencies, decreases transaction costs, and strengthens bilateral trade relations.

Q5. How should civil services aspirants approach the topic of international finance agreements?
Answer: Aspirants should analyze the economic, geopolitical, and financial implications of such agreements, considering their impact on international relations and economic strategies.

UPSC Practice MCQs

Question 1: What is the primary aim of the RBI and Bank Indonesia MoU?
A) To promote USD transactions
B) To enhance the use of local currencies
C) To create a Euro-based market
D) To reduce foreign investments
Correct Answer: B

Question 2: When was the MoU between RBI and Bank Indonesia signed?
A) March 7, 2024
B) July 2023
C) January 2023
D) December 2024
Correct Answer: A

Question 3: Which currencies are being promoted through the MoU?
A) USD and Euro
B) GBP and JPY
C) INR and IDR
D) AUD and CAD
Correct Answer: C

Question 4: What is a key benefit of using local currencies in trade?
A) Increased reliance on the USD
B) Higher transaction costs
C) Reduced settlement times
D) Limited trade opportunities
Correct Answer: C

Question 5: Which other country has the RBI signed a similar MoU with?
A) USA
B) UAE
C) China
D) Japan
Correct Answer: B

Question 6: What does the MoU signify for India's international finance strategy?
A) A shift to a single currency
B) Strengthening local currency usage
C) Isolation from global markets
D) Reducing exports
Correct Answer: B

Question 7: How does the MoU align with global economic trends?
A) By promoting foreign currencies
B) By enhancing dependency on USD
C) By facilitating national currency transactions
D) By limiting trade agreements
Correct Answer: C