India and Sri Lanka are discussing shifting away from the US dollar to settlements using the Indian rupee, as the two countries look to strengthen their partnership through trade and investments.

Rupee settlements are expected to derive benefits like shorter timelines, lower exchange costs and easier availability of trade credits for participating financial institutions. The initiative may also have a beneficial impact on the nations' respective tourism and hospitality industries.

A discussion of the issue, arranged by the High Commission of India, was held in the Sri Lankan capital Colombo last week.

"Representatives from the Bank of Ceylon, State Bank of India, and the Indian Bank shared their experiences and informed the audience that they had started carrying out INR-denominated trade transactions through respective Vostro/Nostro accounts after the creation of [an] enabling framework by the Reserve Bank of India [RBI] and the Central Bank of Sri Lanka [CBSL] in 2022," the commission said in a statement, seen by the PTI news agency.

The shift can only boost the countries' joint efforts in building a stronger and closer economic partnership through trade and investment-led measures, Gopal Baglay, India's High Commissioner to Sri Lanka, said.

Last year, Sri Lanka was hit by the worst economic crisis since the South Asian country declared independence from Britain in 1948. The crisis, initially caused by a shortage of foreign currency arising from the pandemic-related restriction of tourism, led to dire shortages of fuel, food and basic necessities. The country’s government didn’t have the funds to pay for imports.

In April, Sri Lanka defaulted on its foreign debt of $34.8 billion, according to its Department of External Resources.

Governor of the Central Bank of Sri Lanka Nandalal Weerasinghe praised the currency-switch measure, saying the Indian and Sri Lankan business communities strongly support it.