Facts for Prelims (FFP)
Source: IE
Context: India and the United Arab Emirates (UAE) signed a Memorandum of Understanding (MoU) to establish Local Currency Settlement System (LCSS) for using local currencies, the Indian rupee (INR), and the UAE Dirham (AED), for cross-border transactions.
- LCSS will promote the use of INR and AED for current accounts and permitted capital account transactions between the two countries.
- India-UAE trade was approx USD 85 billion in 2022. UAE is India’s third-largest trading partner while India is UAE 2nd largest trading partner.
What is a Local Currency Settlement System (LCSS)?
The Local Currency Settlement System (LCSS) is a mechanism that enables cross-border transactions between two countries to be conducted in their respective domestic currencies.
- It allows exporters and importers to invoice and make payments in their local currencies, reducing the reliance on a third-party currency such as the US dollar.
For example,
Let’s consider a scenario where a company in India exports goods to a company in the United Arab Emirates (UAE). With the LCSS in place, the Indian exporter can issue an invoice in Indian rupees (INR), and the UAE importer can make the payment in UAE dirhams (AED).
Advantages:
| Advantages | Examples |
| Reduction in foreign exchange costs | An Indian exporter can invoice in INR, and a UAE importer can pay in AED, eliminating the need for currency conversion to a third-party currency like USD. |
| Mitigation of exchange rate risks | Companies can hedge exchange rate risks by transacting in local currencies, limiting losses caused by fluctuations in exchange rates. |
| Improved transaction efficiency | Transaction processes can be streamlined as parties can invoice and settle payments in their domestic currencies, reducing complexities and time delays. |
| Enhanced trade and investment opportunities | The use of LCSS promotes bilateral trade and investment between India and UAE by facilitating easier and more efficient cross-border transactions. |
| Optimized remittances | Indian residents in the UAE can send remittances in INR, benefiting from lower transaction costs and faster settlement times. |
Other agreements between India and UAE:
- The two countries agreed to link India’s Unified Payments Interface (UPI) with UAE’s Instant Payment Platform (IPP).
- The two countries agreed to link their respective Card Switches vis-a-vis RuPay switch and UAESWITCH to enable mutual acceptance of domestic cards and processing of these card transactions.
- India’s Structured Financial Messaging System (SFMS) will be linked with messaging system in UAE to ease their financial messaging.
- Also, India will establish an IIT-Delhi campus in Abu Dhabi, which would be the second IIT abroad after Tanzania.
For overall India-UAE relations: Click here
