Benefits of new UAE-India MoUs for traders and NRIs
Boosting Trade and Transactional Ecosystem The groundbreaking agreements signed by the UAE and India in Abu Dhabi have significant implications for the trade and transactional ecosystem of both nations, strengthening economic engagement.
UAE-India Agreements Set Path for Enhanced Economic Collaboration
The launch of the dirham-rupee trade settlement and the establishment of a real-time interlinking payment and messaging system for cross-border transactions provide exporters and importers with the ability to invoice and pay in their respective domestic currencies. This shields them from exchange rate fluctuations and facilitates cross-border investment.
Enhanced Investments and Remittances
The new arrangements between the UAE and India will help boost investments and remittances between the two countries. Utilizing local currencies optimizes transaction costs and settlement time, benefiting various transactions, including remittances from the Indian community residing in the UAE. The use of local currencies is expected to streamline economic interactions and contribute to economic growth.
Promoting Local Currency Settlement System
The Memorandum of Understanding (MoU) signed by the Central Bank of UAE (CBUAE) and the Reserve Bank of India (RBI) establishes a local currency settlement system (LCSS) covering current account and permitted capital account transactions. The LCSS enables exporters and importers to conduct transactions in their respective domestic currencies, fostering the development of a dirham-rupee foreign exchange market.
These strategic initiatives align with the global trend towards de-dollarization, particularly in the aftermath of the Russia-Ukraine conflict. By exploring alternative payment channels and promoting the use of local currencies, countries like the UAE and India aim to maintain smooth trade lines. Given the UAE's significant role as a supplier of crude oil, LPG, and LNG to India, the move towards de-dollarization assumes greater significance.
Pivotal Agreements for Cooperation
Describing the agreements as pivotal, Indian Prime Minister Narendra Modi highlighted their significance in bolstering cooperation between the two nations in areas such as trade, energy, and climate action. These agreements pave the way for enhanced economic collaboration and simplify international financial interactions. The bilateral trade between the UAE and India has seen remarkable growth, reaching $85 billion, with a target of achieving $100 billion.
First Transactions and Trade Benefits
Following the adoption of the new trade settlement system, the first deal was transacted with the export of 25kg gold to YES Bank in Mumbai for a rupee payment. By conducting transactions in local currencies, the risk of exchange rate fluctuations is minimized, expediting the settlement process and promoting stability and transparency. These agreements complement the opportunities offered by the India-UAE Comprehensive Economic Cooperation Agreement (Cepa) and facilitate economic convergence.
Advancing Economic Convergence
The trade and economic partnership between the UAE and India has witnessed significant growth since the signing of the Cepa in 2022. The agreements on settlement of trade in domestic currencies and interlinking payment systems further pave the way for strategic economic convergence between the two countries. These initiatives also open up possibilities for similar arrangements with other countries in the region and beyond.
Exploring Alternative Payment Systems
The interlinking of payment systems includes the linking of India's unified payments interface (UPI) with the UAE's instant payment platform (IPP) and the respective payment card switches (RuPay switch and UAESWITCH). The aim is to streamline transaction settlements between banks and explore alternatives to SWIFT, the global messaging network for financial transactions.
Potential Benefits of MoUs
The dirham-rupee settlement and interlinking of payment agreements hold several benefits for traders, non-resident Indians (NRIs), and investors. These agreements have the potential to optimize transaction costs, enhance settlement efficiency, promote stability in trade, and simplify cross-border financial interactions. The advantages may vary depending on individual circumstances and transactional requirements.