India and the United Arab Emirates (UAE) have recently penned down an agreement to establish the Local Currency Settlement System (LCSS) that aims to facilitate the use of the Indian rupee (INR) and UAE Dirham (AED) for cross-border transactions. The deal was cemented during the Prime Minister’s latest visit to Abu Dhabi, UAE. This initiative follows the Reserve Bank of India’s (RBI) 2022 framework announcement to settle Global Trade in Rupees, chiefly focusing on trade with Russia.
Key Agreements: LCSS and UPI-IPP
Firstly, LCSS covers all current and permitted capital account transactions. It will enable exporters and importers to pay in their respective domestic currencies, thus facilitating the development of an INR-AED forex market. This system will lower transaction costs and reduce settlement time, including for remittances by Indians in the UAE. Moreover, India could leverage this mechanism to pay for oil imports and other commodities from the UAE, one of its primary energy suppliers.
Secondly, the central banks of both nations signed a Memorandum of Understanding (MoU) to collaborate on uniting India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP) and integrating RuPay switch with UAESWITCH. This interconnection will support users in both countries in executing fast, safe and inexpensive cross-border transfers while facilitating the mutual acceptance of domestic cards and processing card transactions.
Stepping into the Education Sector: IIT Delhi campus in Abu Dhabi
An MoU has been signed for the establishment of the IIT Delhi campus in Abu Dhabi as part of the ‘IITs go Global’ campaign. This initiative is expected to start offering degrees starting 2024, with a vast range of courses like Energy and Sustainability, AI, Computer Science and Engineering, Healthcare, Mathematics, Computing and other fields of engineering, sciences and humanities.
Significance of Rupee-Based Cross Border Transaction
The rupee-based transaction is a robust policy move by India to internationalize the Rupee in a bid to decrease the dollar demand. The RBI’s plan to settle international trade in the local currency will allow importers to make payments in rupees, credited to the special account of the corresponding bank of the partner country, while exporters will receive their payments from corresponding special account balances.
India-UAE Bilateral Relations: Trade and Defence
India and the UAE established diplomatic relations in 1972 and have seen significant growth in bilateral relations since the past few decades. In 2022-23, the bilateral trade between India and the UAE reached approximately USD 85 billion, making the UAE India’s 3rd largest trading partner and 2nd largest export destination. There are multiple defense exercises conducted bilaterally and multilaterally, such as the In-UAE BILAT, Desert Eagle-II, Exercise Desert Flag-VI, Pitch Black, and Red Flag.
Way Forward
The successful implementation of the India-UAE LCSS can potentially serve as a precursor for other bilateral currency agreements. This will be an important first step towards the internationalization of the rupee. Continuous collaboration in technology, renewable energy, infrastructure development, tourism, and healthcare sectors can further solidify the India-UAE bilateral relationship.
While this initiative has great potential, its success largely depends on the acceptance and adoption by businesses in both nations.
