India- UAE Local Currency Settlement System (LCSS)

19 Jul 2023

uae dirham rupee india lcss local currency

Central Idea

India and the United Arab Emirates (UAE) signed a pact during PM Modi’s visit to Abu Dhabi.
It established a framework for promoting the use of the Indian rupee (INR) and UAE Dirham (AED) in cross-border transactions.

LCSS Establishment: The framework aims to establish a Local Currency Settlement System (LCSS) between India and the UAE.
Domestic Currency Transactions: LCSS enables exporters and importers to invoice and pay in their respective domestic currencies.
Foreign Exchange Market Development: LCSS facilitates the development of an INR-AED foreign exchange market.
Transaction Optimization: The use of local currencies optimizes transaction costs and settlement time.
Remittance Benefits: LCSS benefits remittances from Indians residing in the UAE.

Payment System Linkage: The Memorandum of Understanding (MoU) includes the linking of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP).
Card Switches and Messaging Systems: It explores linking the card switches (RuPay switch and UAESWITCH) and messaging systems of both countries.
Efficient Cross-Border Fund Transfers: UPI-IPP linkage facilitates fast, convenient, safe, and cost-effective cross-border fund transfers.
Mutual Acceptance of Domestic Cards: The agreement enables the mutual acceptance of domestic cards and processing of card transactions.

Trade boost: Bilateral trade between India and the UAE reached around $85 billion in FY23.
Exchange Rate Risk Management: The agreement helps Indian exporters’ hedge exchange rate risks in rupee-based trade.
Internationalization of the Rupee: It supports India’s efforts to internationalize the rupee and reduce dependence on the US dollar.
Interest from Other Countries: Countries in Africa, the Gulf region, Sri Lanka, and Bangladesh have shown interest in trading in rupee terms.

Denominating in Local Currencies: Denominating export contracts and invoices in local currencies minimizes exchange-rate risks and aids in competitive pricing.
Enhanced Cooperation: Enhanced cooperation between the banking systems of India and the UAE supports trade and economic activity.
Major Export Categories: Major Indian exports to the UAE include mineral fuels, pearls, precious stones, electrical machinery, and equipment.
Trade Growth and Destination: The UAE is India’s second-largest export destination, and India-UAE trade reached $85 billion in 2022.

Reduced Transaction Costs: The agreement reduces high transaction costs and exchange rate margins associated with remittances.
Affordable and Efficient Remittances: It makes remittances more affordable and efficient, particularly for low-wage earners.
Increased Remittance Inflows: In 2022, India experienced a 24.4% increase in remittances to $111 billion, accounting for 3.3% of GDP.
Contribution of GCC Countries: Remittance inflows from Gulf Cooperation Council (GCC) countries contribute significantly to India’s total remittance inflows.

Reducing Dollar Dependence: The agreement promotes the use of local currencies, reducing dependence on the US dollar in international transactions.
Strengthening Economic Ties: Strengthened economic ties between India and the UAE encourage investments, remittances, and trade growth.
Rupee Internationalization: The agreement aligns with India’s goal of internationalizing the rupee and expanding its global acceptance.
Similar Cross-Border Efforts: Similar efforts, such as collaboration with Singapore’s PayNow, have been undertaken to facilitate cross-border transactions.

The agreement positively impacts bilateral trade, facilitates remittances, and supports India’s goal of internationalizing the rupee.
By reducing transaction costs and enhancing financial connectivity, the agreement strengthens economic relations between India and the UAE, fostering trade growth and cooperation.

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