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India-UAE Pact on Local Currency Settlement System (LCSS)


India and the United Arab Emirates (UAE) have signed a pact to establish Local Currency Settlement System (LCSS) to promote the use of the Indian rupee (INR) and UAE Dirham (AED) for cross-border transactions.


GS II: International Relations

Dimensions of the Article:

  1. Key Agreements during India-UAE Pact
  2. Significance of Rupee-Based Cross Border Transactions

Key Agreements during India-UAE Pact

  • The Local Currency Settlement System (LCSS) covers current account and permitted capital account transactions.
  • It enables exporters and importers to transact in their domestic currencies (INR and AED) and facilitates the development of an INR-AED forex market.
  • The system reduces transaction costs and settlement time, including remittances from Indians in the UAE.
  • India can utilize this mechanism for paying for imports, including oil and other commodities, from the UAE.
  • The central banks of India and the UAE have signed an agreement to link India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP) and card switches (RuPay switch and UAESWITCH).
  • The UPI-IPP link enables fast, secure, and cost-effective cross-border transfers between the two countries.
  • The linking of card switches allows the mutual acceptance of domestic cards and processing of card transactions.
  • The Reserve Bank of India (RBI) and the Central Bank of UAE signed the Memoranda of Understanding (MoUs) for these collaborations.
IIT Delhi Campus in Abu Dhabi:
  • An MoU was signed to establish a campus of the Indian Institute of Technology (IIT) Delhi in Abu Dhabi.
  • This campus is part of the “IITs go Global” campaign and will be the second international IIT campus after IIT Madras in Zanzibar, Tanzania.
  • The campus will offer degrees starting from 2024, covering various fields such as Energy and Sustainability, AI, Computer Science and Engineering, Healthcare, Mathematics and Computing, and other engineering, science, and humanities disciplines.

Significance of Rupee-Based Cross Border Transactions

  • Mitigating exchange rate risks: Rupee-based cross border transactions help Indian exporters reduce their exposure to exchange rate fluctuations, thereby limiting potential losses.
  • Internationalization of the Rupee: Encouraging trade in rupee terms is part of India’s strategy to promote the internationalization of the Indian rupee and reduce dependence on the US dollar.
  • Increased interest from various countries: Apart from Russia, countries in Africa, the Gulf region, Sri Lanka, and Bangladesh have shown interest in conducting trade in rupee terms, indicating the growing acceptance of the Indian currency in cross-border transactions.
  • Simplified payment process: The Reserve Bank of India’s plan to settle international trade in the local currency allows importers to make payments in rupees, which are then credited to the correspondent bank’s special account in the partner country. Exporters, on the other hand, receive payments from the designated special account’s balances.
  • Boosting trade and economic ties: Facilitating rupee-based transactions can enhance trade and economic cooperation between India and its trading partners, promoting bilateral relations and creating opportunities for increased trade volumes.
  • Managing liquidity and foreign exchange reserves: Rupee-based transactions help in managing liquidity and foreign exchange reserves as they reduce the demand for US dollars and promote the use of the Indian currency in international trade settlements.

-Source: Indian Express

December 2023