The Reserve Bank of India (RBI) and the Bank Indonesia (BI) signed a Memorandum of Understanding (MoU) on Thursday for establishing a framework to promote the use of local currencies — the Indian Rupee (INR) and the Indonesian Rupiah (IDR) for cross-border transactions.

The MoU was signed by the Governor, Reserve Bank of India, Shaktikanta Das and the Governor, Bank Indonesia, Perry Warjiyo.

The MoU on establishing a framework for cooperation in the area of cross-border transactions in local currencies between India and Indonesia, aims to promote the use of INR and IDR bilaterally.

The MoU covers all current account transactions, permissible capital account transactions and any other economic and financial transactions as agreed upon by both countries.

“This framework would enable exporters and importers to invoice and pay in their respective domestic currencies, which in turn would enable the development of an INR-IDR foreign exchange market. Use of local currencies would optimise costs and settlement time for transactions,” RBI said in a statement.

This collaboration marks a key milestone in strengthening bilateral cooperation between RBI and BI.

“Use of local currencies in bilateral transactions will eventually contribute to promoting trade between India and Indonesia as well as deepen financial integration and strengthen the long historical, cultural and economic relations between India and Indonesia,” the central bank.

Indian rupee from being a relatively weak currency started its journey toward internationalisation. The value of a country’s currency and its usage for global trade are among the key indicators for gauging its economic stride.

Banks from over 20 countries have opened special Rupee vostro accounts in Indian banks in order to trade in local currency as part of gradual de-dollarisation plans, the Parliament was informed in 2023.

Simply put, vostro accounts enable domestic banks to provide international banking services to clients who have global banking needs.

The Reserve Bank of India in 2022 put in place an arrangement, allowing transactions in domestic currencies to promote the growth of global trade with an emphasis on exports from India and to bring in increasing interest towards the rupee.

The internationalisation of the rupee gathered steam following the Reserve Bank of India’s (RBI) announcement of a mechanism to settle payments for international trade in rupees, especially for India’s exports. The RBI allowed invoicing and payments for international trade in Indian Rupee on July 11, 2022.

Experts widely believe if the mechanism fructifies then it may go a long way in internationalizing the Indian currency rupee in the long run. A currency can be termed “international” if it is widely accepted worldwide as a medium of exchange.