India, UAE sign agreements for local currency trade, real-time payments

Dubai: India and the United Arab Emirates (UAE) on Saturday signed significant agreements aimed at enhancing bilateral trade and facilitating smoother cross-border money transfers.

These agreements allow for the use of local currencies, eliminating the need for dollar conversions and reducing transaction costs.

During Indian Prime Minister Narendra Modi's visit to the UAE, the two countries reached an agreement to settle trade in rupees, which will benefit India by cutting transaction costs. Additionally, they established a real-time payment link to facilitate easier cross-border money transfers.

It is always gladdening to meet HH Sheikh Mohamed bin Zayed Al Nahyan. His energy and vision for development are admirable. We discussed the full range of India-UAE ties including ways to boost cultural and economic ties. @MohamedBinZayed pic.twitter.com/XCBWW8cP38

— Narendra Modi (@narendramodi) July 15, 2023

The Reserve Bank of India (RBI) stated that these agreements will promote seamless cross-border transactions and payments, fostering greater economic cooperation between the two nations. The memorandum of understanding (MoU) focuses on establishing a framework for using local currencies, specifically the Indian Rupee (INR) and the UAE Dirham (AED), for transactions between India and the UAE.

Reserve Bank of India and Central Bank of the UAE sign two MoUs to (i) establish a Framework to Promote the Use of Local Currencies for Cross-border Transactions and (ii) cooperation for interlinking their payment and messaging systemshttps://t.co/vGzbgyrsyK

— ReserveBankOfIndia (@RBI) July 15, 2023

This initiative aims to implement a Local Currency Settlement System (LCSS) that encourages the bilateral use of INR and AED. The agreement covers all current account transactions and permitted capital account transactions.

By enabling exporters and importers to invoice and pay in their respective domestic currencies, the LCSS will contribute to the development of an INR-AED foreign exchange market. This arrangement will also facilitate investments and remittances between the two countries. Furthermore, the use of local currencies will optimize transaction costs and settlement time for various transactions, including remittances from Indians residing in the UAE.

India, being the world's third-largest oil importer and consumer, has traditionally paid for UAE oil in dollars. However, with these new agreements, India may make its first rupee payment for UAE oil to Abu Dhabi National Oil Co (ADNOC), according to an official familiar with the details.

This move aligns with the growing trend in Asia to utilize local currencies for trade settlements, which typically leads to lower payment costs. The bilateral trade between India and the UAE reached $84.5 billion during the period from April 2022 to March 2023.