India, UAE Sign MoU To Set Up Local Currency Settlement Framework In Bilateral Trade

The move comes amid India's ongoing efforts to promote the use of the rupee for international transactions. In the past year, the government has actively encouraged the global use of the rupee.

The MoU was signed by Reserve Bank of India (RBI) Governor Shaktikanta Das and Khaled Mohamed Balama, the governor of the Central Bank of the UAE, during Prime Minister Narendra Modi's visit to the United Arab Emirates (UAE) on Saturday.  ( Image Source :Getty )

India and the United Arab Emirates (UAE) have signed a Memorandum of Understanding (MoU) to establish a framework for utilising their respective local currencies for bilateral transaction settlements. The MoU was signed by Reserve Bank of India (RBI) Governor Shaktikanta Das and Khaled Mohamed Balama, the governor of the Central Bank of the UAE, during Prime Minister Narendra Modi's visit to the United Arab Emirates (UAE) on Saturday. 

"The MoU on establishing a framework for the use of local currencies for transactions between India and the UAE, aims to put in place a Local Currency Settlement System to promote the use of INR (Indian rupee) and AED (UAE Dirham) bilaterally," the RBI said in a statement, adding that "the MoU covers all current account transactions and permitted capital account transactions."

Following the announcement, Prime Minister Narendra Modi in a tweet said that the MoU will pave the way for enhanced economic collaboration and will make international financial interactions simpler. 

This is a very important aspect of India-UAE cooperation. It paves the way for enhanced economic collaboration and will make international financial interactions simpler. https://t.co/nuoQbUIFq6

— Narendra Modi (@narendramodi) July 15, 2023

The move comes amid India's ongoing efforts to promote the use of the rupee for international transactions. In the past year, the government have actively encouraged the global use of the rupee, including the establishment of a mechanism by the Reserve Bank of India (RBI) in July 2022 to facilitate global trade settlements in rupees. 

The rupee settlement mechanism was reportedly used for purchasing discounted oil from Russia following its invasion of Ukraine in February 2022. However, the mechanism did not gain significant traction. Reports emerged stating that negotiations for settling bilateral trade in rupees between India and Russia were suspended as Russia had accumulated a substantial amount of rupees in Indian banks that it couldn't utilise the same. Instead, India continues to predominantly use US dollars for its oil imports from Russia, with a small portion reportedly being paid in a combination of currencies, including UAE's dirhams and the Chinese yuan. 

The RBI on Saturday said that the establishment of a local currency settlement system with the United Arab Emirates (UAE) would enable traders to issue invoices and make payments in their respective domestic currencies. This development would facilitate the growth of a rupee-dirham foreign exchange market, allowing for smoother and more efficient currency exchange between the two nations.

"This arrangement would also promote investments and remittances between the two countries. Use of local currencies would optimise transaction costs and settlement time for transactions, including for remittances from Indians residing in UAE," the RBI added.

The UAE emerged as India's third-largest trade partner in the fiscal year 2022-23. During this period, India imported goods worth $53.23 billion from the UAE, while exports to the West Asian nation totaled $31.61 billion. 

Under the MoU, the two central banks also agreed to cooperate on linking India's Unified Payments Interface (UPI) of India with UAE's Instant Payment Platform (IPP). 

"The UPI-IPP linkage will enable the users in either country to make fast, convenient, safe, and cost-effective cross-border funds transfers," the RBI said. 

The counties also agreed to link the respective Card Switches (RuPay switch and UAESWITCH) and explore the linking of payments messaging systems,  the Structured Financial Messaging System (SFMS) of India with the messaging system in the UAE.

"The linking of Card Switches will facilitate mutual acceptance of domestic cards and processing of card transactions. The linkage of messaging systems is aimed to facilitate bilateral financial messaging between the two countries," the central banks added.