Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India- UAE Local Currency Settlement System (LCSS)


From UPSC perspective, the following things are important :

Prelims level: Local Currency Settlement System (LCSS)

Mains level: Read the attached story

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.

Local Currency Settlement System (LCSS)

  • 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.

Interlinking of Payment Systems: UPI-IPP Linkage

  • 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.

Impact of the Move

  • 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.

Significance for Exporters

  • 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.

Benefits for Remittances

  • 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.

Larger Impact

  • 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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