India and UAE set to use rupee, dirham for trade

Subject : Economy

Section: External Sector

Concept :

India and the United Arab Emirates (UAE) have agreed to build a framework to promote the use of the rupee and the UAE Dirham (AED) in cross-border transactions.

India and MoU Agreement

The Reserve Bank of India (RBI) and the Central Bank of the United Arab Emirates (CBE) have signed two Memoranda of Understanding (MoU) with respect to various topics.
The first agreement will provide a framework to encourage cross-border transactions in local currencies (rupee and dirham).
In accordance with the second MoU, the two central banks would work together to connect the Unified Payments Interface (UPI) of India with the Instant Payment Platform (IPP) of the UAE, as well as with RuPay switch and UAESWITCH.
A messaging system that could compete with SWIFT (the Society for Worldwide Interbank Financial Telecommunication) will also be developed by both nations.

Local Currency Settlement System (LCSS)

A Local Currency Settlement System (LCSS) would be implemented as part of the MoU on using national currencies to encourage the usage of the rupee and dirham.
All permissible capital account transactions as well as current account transactions are covered under the agreement.
Exporters and importers will be able to settle their invoices in their respective home currencies thanks to the LCSS, which will also help the INR-AED foreign exchange market grow.

Significance for India

The Reserve Bank of India (RBI) and the Central Bank of the UAE made the decision to advance the development of their economic cooperation.
Additionally, the LCSS agreement will encourage cross-border transfers of money and investments.
Using local currencies will speed up settlement and cut down on transaction expenses, notably for Indian remittances to the UAE.
India may utilise this system to pay for imports of goods from the UAE, its fourth-largest energy source, including oil and other commodities.
Presently, India pays the UAE in dollars for its oil.
Additionally, the Structured Financial Messaging System (SFMS) of India and the UAE’s payments messaging system will be connected via the MoUs.