According to people familiar with the matter cited by Bloomberg, representatives from the two countries are in advanced talks, and a formal announcement could follow as soon as the formalities are taken care of. India’s Finance Minister Nirmala Sitharaman and Indonesian Finance Minister Sri Mulyani Indrawati discussed the proposals ahead of meetings among the Group of Twenty countries in India.
India has reached a similar agreement with the United Arab Emirates recently, which will support trades in rupees and dirhams while enabling domestic credit cards to be used in retail transaction processing.
Specifically, in July 2023, the central banks of India and the United Arab Emirates reached an agreement to establish a framework to promote the use of local currencies for cross-border transactions. The two entities also agreed to link up their payment and messaging systems, a move that was in line with India’s mission to move away from the US-dominated SWIFT payments interface. The agreement between the two nations was signed during a one-day visit to the UAE by India's Prime Minister Narendra Modi.
India is looking to internationalise the rupee and reduce its reliance on the US dollar. However, Bloomberg reports low success levels with trade volumes remaining below USD 120 million since the Reserve Bank of India allowed more than a dozen banks to settle trade in rupees with 18 nations in 2022.
In July 2023, all members of the Asian Clearing Union agreed to move towards local currency settlement in a bid to reduce dependence on the US dollar. The Asian Clearing Union (ACU) includes all the countries in South Asia, as well as Myanmar and Iran. According to representatives from the Central Bank of Myanmar cited by Bloomberg, nine central banks with ties to the Union have agreed to settle trade in local currencies, including the Indian rupee.
The same source reported that India will likely lead in the settlement of trades in the ACU, which had transactions worth USD 28.8 billion in 2021.
Some of the main advantages of invoicing in local currencies include preserving foreign exchange reserves in times of crisis for developing nations. For instance, Iran has sought trade in non-dollar currencies as a response to repeated sanctions from the US. For countries in the ACU, the option of converting to the dollar and euro will remain on the table. These countries will also be able to invest in financial assets using excess currencies.
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