A Memorandum of Understanding (MoU) has been signed between India and the United Arab Emirates (UAE) to establish a framework that will enhance the usage of local currencies for cross-border transactions.
On July 15, 2023, the Governor of the Reserve Bank of India, Shaktikanta Das, and the Governor of the Central Bank of UAE (CBUAE), Khaled Mohamed Balama, signed two Memorandums of Understanding (MoU).
The purpose of the MoUs is to enhance the utilisation of local currencies for cross-border transactions and to connect their payment and messaging systems.
Key Facts About The Rupee-Dirham Trade Pact
- The first Memorandum of Understanding (MoU) between India and the UAE aims to create a Local Currency Settlement System (LCCS) that will encourage the use of Indian Rupees (INR) and UAE Dirhams (AED) for transactions between the two countries.
- The MoU includes all permissible capital account transactions and ongoing current account transactions.
- The MoU aims to further promote the use of the rupee for settling international transactions.
- Creation of LCSS will allow exporters and importers to use their local currencies for invoicing and payment. This would facilitate the development of an INR-AED foreign exchange market.
- Using local currencies would reduce transaction costs and decrease settlement time for transactions, including remittances from Indians living in the UAE.
- In such deals, the two central banks agree to a swap arrangement and regularly settle any surplus at a fixed exchange rate. This helps to protect traders from the risks of fluctuations in exchange rates.
- The UAE and India use the US dollar for settling trade payments. However, trading in local currencies would allow them to save on foreign currency conversion fees and make the flow of capital smoother.
- The second Memorandum of Understanding focused on ‘Payments and Messaging Systems’. It aimed to connect India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP) by linking their respective Fast Payment Systems (FPSs). Additionally, the agreement included linking the payment card switches of both countries, namely RuPay switch and UAESWITCH.
- Agreement between the two central banks to explore linking of payment messaging systems, namely India’s Structured Financial Messaging System (SFMS) and the messaging system in the UAE, is considered a foundation for creating an alternative to SWIFT.
Why India Wants To Deal In Local Currencies
- India is looking for ways to reduce its reliance on the US dollar and promote the use of its own rupee for bilateral trade.
- Trading in local currencies also expedites the settlement process and increases two-way trade with partner countries as it brings stability and transparency to transactions.
- It has also encouraged other governments and central banks to consider similar arrangements.
- The Rupee-Dirham Trade Pact happened because of the conflict between Russia and Ukraine. Countries wanted to use different ways to pay for things so trade could still happen.
- Following the sanctions, Russia has started using a different method for carrying out international transactions. This has led other governments and central banks to consider developing their own similar methods.
- Government and RBI are working towards making the rupee a global currency. As part of this effort, 60 banks from 18 nations have been given permission to transact in rupees through a special account.
- India is currently holding advanced trade talks with multiple countries to conduct trade using their own local currencies.
- This decision aims to enhance free trade between India and their partner countries.