India and Malaysia have taken a step towards strengthening their economic ties by agreeing to allow bilateral trade in their respective currencies, which will allow Indian businesses to pay Indian Rupees and vice versa. This is expected to boost trade between the two countries and reduce dependence on the US dollar.
Malaysia and India have had a prosperous economic partnership for many years. The two nations’ bilateral commerce in 2019–20 was $17.4 billion. Malaysia imports palm oil, electronics, and chemicals from India, whereas Malaysia exports petroleum products, organic chemicals, and textiles to Malaysia. However, Malaysia has benefited from a positive trade balance, and India has been aiming to boost exports to Malaysia. The use of local currencies by each country will help reduce transaction costs and exchange rate risks resulting in lower prices for the customers. It also decreases the dependence on the US dollar which is currently dominating the global trade market and promotes the relevance of regional currencies.
The effort of the Indian government to increase its engagement in South Asia has paved the way with the agreement of trading in local currencies. India has tried to economic footprint in the region in the last decade and has signed similar agreements with other countries such as Japan, South Korea, and Iran.
This agreement is of equal importance to Malaysia as it has also been finding ways to decrease its dependence on the US dollar as the appreciation of the dollar has hit the Malaysian market resulting in higher import costs and a trade deficit. The use of local currencies is expected to reduce the impact of currency fluctuations and stabilize the trade balance. The agreement will allow bilateral trade to benefit in various sectors such as palm oil, petroleum products, and textiles by providing lower transaction costs and lower import costs.
Thus, this agreement will allow both countries to take a significant step towards strengthening their economic ties by reducing transaction costs, reducing the relevance of the dollar in their trade exchanges, and increasing trade volumes. With this agreement, India and Malaysia have set an example for other countries to follow, and it is expected that more countries will adopt similar measures in the future.