Local Currency Settlement System (LCSS) between India and the UAE

During Prime Minister Modi’s visit to Abu Dhabi, India and the United Arab Emirates (UAE) inked a treaty.
It established a framework to encourage the usage of the Indian rupee (INR) and the UAE dirham (AED) in cross-border transactions.

Establishment of a Local Currency Settlement System (LCSS): The framework proposes to establish a Local Currency Settlement System (LCSS) between India and the UAE.
Domestic Currency Transactions: Exporters and importers can invoice and pay in their respective domestic currencies using LCSS.
Foreign Exchange Market Development: LCSS helps to build an INR-AED foreign exchange market.
Transaction Optimisation: Using local currencies reduces transaction costs and delays.
Remittance advantages: Remittances from Indians living in the UAE are eligible for LCSS advantages.

Payment System Integration: The MoU covers the integration of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP).
Card Switches and Messaging Systems: It investigates the integration of both countries’ card switches (RuPay switch and UAESWITCH) and messaging systems.
Efficient Cross-Border Fund Transfers: The UPI-IPP link allows for quick, convenient, safe, and cost-effective cross-border fund transfers.
Domestic Card Acceptance: The agreement allows for the mutual acceptance of domestic cards as well as the processing of card transactions.

Bilateral trade between India and the UAE increased to over $85 billion in FY23.
Exchange Rate Risk Management: The agreement assists Indian exporters in hedging exchange rate risks in trade based on the rupee.
Rupee Internationalisation: It backs India’s efforts to internationalise the rupee and lessen reliance on the US currency.
Other Countries’ Interest: Countries in Africa, the Gulf area, Sri Lanka, and Bangladesh have expressed an interest in trading in rupee terms.

Contracts and Invoices in Local Currencies: Denominating export contracts and invoices in local currencies reduces exchange-rate risks and improves competitive pricing.
Enhanced Cooperation: Improved cooperation between India’s and the UAE’s banking systems promotes commerce and economic activities.
Mineral fuels, pearls, precious stones, electrical machinery, and equipment are among the most important Indian exports to the UAE.
commerce Growth and Destination: The UAE is India’s second-largest export destination, with commerce between the two countries expected to reach $85 billion by 2022.

Reduced Transaction Costs: The agreement reduces remittances’ high transaction costs and exchange rate margins.
Remittances Are More Affordable and Efficient: It makes remittances more affordable and efficient, especially for low-wage earners.
Increased Remittance Inflows: Remittances to India increased by 24.4% to $111 billion in 2022, accounting for 3.3% of GDP.
GCC Countries’ Contribution: Remittances from Gulf Cooperation Council (GCC) countries account for a sizable portion of India’s total remittance inflows.

Reducing currency Dependence: The agreement encourages the use of local currencies in international transactions, reducing reliance on the US currency.
Economic links: Economic links between India and the UAE that are strengthened boost investments, remittances, and trade growth.
Internationalisation of the Rupee: The agreement supports India’s goal of internationalising the rupee and growing its global recognition.
Similar Cross-Border Efforts: Similar efforts have been made to enable cross-border transactions, such as collaboration with Singapore’s PayNow.

The deal benefits bilateral trade, enables remittances, and helps India achieve its goal of internationalising the currency.
The agreement promotes economic links between India and the UAE by lowering transaction costs and improving financial connectivity, boosting trade growth and cooperation.

Soource: https://indianexpress.com/article/explained/explained-economics/india-uae-establish-local-currency-settlement-system-explained-8840067/