How India and UAE are planning to promote use of local currencies for cross-border transactions

Source: The post is based on the article “How India and UAE are planning to promote use of local currencies for cross-border transactions” published in Indian Express on 15th July 2023

What is the News?

India and the United Arab Emirates (UAE) have signed a pact to establish a framework to promote the use of the rupee and UAE Dirham (AED) for cross-border transactions.

What is the mechanism being setup by India and UAE to promote use of local currencies for cross-border transactions?

The mechanism for the use of local currencies for transactions between India and the UAE aims to put in place a Local Currency Settlement System (LCSS).

This system would enable exporters and importers to invoice and pay in their respective domestic currencies.

India is likely to use this mechanism to pay for crude oil as well as other imports from the UAE, which is currently made in US dollars.

Note: Bilateral trade between India and the UAE was around $85 billion in FY23.India is also the third largest oil importer in the world and the UAE was its fourth biggest supplier of crude.

What are the expected benefits of this mechanism?

Firstly, it would enable the development of an INR-AED foreign exchange market.

Secondly, this arrangement would also promote investments and remittances between the two countries.

Thirdly, the use of local currencies would optimize transaction costs and settlement time for transactions, including for remittances from Indians residing in the UAE.

Why has India signed this mechanism with the UAE?

The move to ink the pact with the UAE is part of a concerted policy effort by India to internationalize the rupee to bring down the dollar demand as a means to insulate the domestic economy from global shocks. 

Government officials had earlier indicated that apart from Russia, countries in Africa, the Gulf region, Sri Lanka and Bangladesh had also expressed interest in trading in rupee terms.