Context: The Reserve Bank of India (RBI) and the Central Bank of the UAE have agreed to establish a framework for enabling the use of the two countries’ local currencies for cross-border transactions.
About the Rupee-Dirham Agreement
- The MoU on establishing a framework for the use of local currencies for transactions between India and the UAE. This MoU aims to put in place a Local Currency Settlement System (LCSS) to promote the use of INR (Indian Rupee) and AED (UAE Dirham) bilateral.
- The creation of the LCSS would enable exporters and importers to invoice and pay in their respective domestic currencies.
- Further, the MoU covers all current account transactions and permitted capital account transactions.
Benefits
- Optimise Transaction Costs: The use of local currencies would optimise transaction costs and settlement time for transactions, including for remittances from Indians residing in UAE.
- Reduces Dependence on Dollar: The move towards permitting payments in the Indian rupee and the UAE dirham is aimed at promoting their use bilaterally, thus reducing the dependence on a third country’s currency such as the U.S. dollar as an intermediary for settling transactions.
- Development of a Rupee-Dirham Foreign Exchange Market: An immediate beneficial consequence of the establishment of the settlement mechanism would be the development of a rupee-dirham foreign exchange market that would help in pricing the two currencies independent of their exchange rates with other currencies such as the dollar and the euro.
- Hedge Exchange Rate Risks: Indian and Emirati businesses would not need to factor in exchange rate risks when quoting to supply goods or services to buyers in the other country, improving the ease of doing business and boosting trade.
- Promote Internationalisation of Rupee: The India-UAE local currency settlement system could also potentially serve as a precursor for other bilateral currency accords which could act as an important first step for the internationalisation of the rupee.
- Investments in Indian Markets: Emirati businesses may see remunerative avenues to deploy the potential rupee flows in case they opt to receive payments in the Indian currency. This may result in stepped up investment by UAE-based firms.
- Serve as Currency Entrepot: UAE may emerge as a currency entrepôt. This will enable Indian businesses to deal with suppliers from other countries e.g. Russia, to use the West Asian country and dirham as a gateway for such transactions.
