India-UAE Local Currency Settlement System is and agreement between India and the United Arab Emirates (UAE) aimed at promoting the use of local currencies—Indian Rupees (INR) and UAE Dirhams (AED)—for cross-border transactions. This collaboration is a significant step towards reducing dependency on global currencies and fostering economic growth in both nations.
Key Highlights of the India-UAE Local Currency Settlement System
- The MoU on establishing a framework for the use of local currencies for transactions between India and the UAE, aims to put in place a Local Currency Settlement System to promote the use of INR (Indian rupee) and AED (UAE Dirham) bilaterally
- The MoU covers all current account transactions and permitted capital account transactions
- The deal was signed during Prime Minister Narendra Modi’s visit to Abu Dhabi
India-UAE Local Currency Settlement System Mechanism
- The framework for the use of local currencies for transactions between India and the UAE aims to put in place a Local Currency Settlement System (LCSS).
- The creation of the LCSS would enable exporters and importers to invoice and pay in their respective domestic currencies, which in turn would enable the development of an INR-AED foreign exchange market
- This arrangement would also promote investments and remittances between the two countries.
- The use of local currencieswould optimise transaction costs and settlement time for transactions, including for remittances from Indians residing in UAE.
India-UAE Local Currency Settlement System Benefits
Impact of the move on Bilateral Trade and Economic Growth
- India is looking to work out a way to hedge exchange rate risks in the rupee-based trade to limit losses for Indian exporters.
- The move to ink the pact with the UAE is part of a concerted policy effort by India to internationalise the rupee to bring down the dollar demand as a means to insulate the domestic economy from global shocks.
- Apart from Russia, countries in Africa, the Gulf region, Sri Lanka and Bangladesh had also expressed interest in trading in rupee terms.
Other Bilateral Agreements Between India and the UAE
- The two countries agreed to link India’s Unified Payments Interface (UPI) with UAE’s Instant Payment Platform (IPP).
- The two countries agreed to link their respective Card Switches vis-a-vis RuPay switch and UAESWITCH to enable mutual acceptance of domestic cards and processing of these card transactions.
- India’s Structured Financial Messaging System (SFMS) will be linked with messaging system in UAE to ease their financial messaging.
- Also, India will establish an IIT-Delhi campus in Abu Dhabi, which would be the second IIT abroad after Tanzania.
India-UAE Bilateral Trade
- India and the UAE have set a target of $100 billion for bilateral trade.
- Encouragingly, the trade volume has already reached $85 billion, showcasing the strong economic ties between the two nations.
- The MoU on trade settlement and fast payment systems is expected to further enhance trade cooperation and facilitate smoother financial transactions.
India- UAE Bilateral Relations
- India and the UAE established diplomatic relations in 1972.
- The greater push has been achieved in bilateral relations when the visit of India’s Prime Minister to the UAE in August 2015 marked the beginning of a new strategic partnership between the two countries.
- In 2022, India became the first country with which the UAE signed a Comprehensive Economic Partnership Agreement.
- The UAE, which imports most of its food requirements, has pledged USD 2 billion to develop a series of food parks in India.
- Defense Exercises: In-UAE BILAT (bilateral naval exercise), Desert Eagle-II (bilateral air force exercise), Exercise Desert Flag-VI: UAE
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