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Simplify Local Currency Trade between India and UAE



  Aug 03, 2023

India and UAE Local Currency Trade


During the fifth visit of PM Modi to the UAE last week, the two countries signed an agreement to trade in local currencies.
 

What is it?

The trade of local currencies between India and the UAE refers to the exchange of Indian Rupees (INR) and Emirati Dirhams (AED) in bilateral trade and transactions between the two countries. (Iska Matlab Indians imports ke liye Rupees use kar sakte hain aur UAE residents Dirham use kar sakte hai thereby overcoming the need for international currencies like US dollar for trade) This practice allows businesses and individuals to conduct trade using their respective local currencies instead of relying solely on international currencies like the US Dollar.That means, Indians can pay for their imports in Indian rupees and UAE can pay in AED.
 

What are the benefits?

Local currency trade promotes
☛ ease of doing business
☛ eliminates the need for currency conversion, which can involve additional costs and exchange rate risks.
☛ simplifies transactions,
☛ enhances transparency
☛ boosts economic cooperation between India and the UAE
☛ serves as a convenient and efficient method of conducting cross-border transactions
☛ promotes bilateral trade and investment between the two nations.
☛ boost remittances
 

What does the Memorandum of Understanding (MoU) between the central banks of the two countries say?

The Reserve Bank of India (RBI) and the Central Bank of the UAE signed the Memorandum of Understanding (MoU) and have established mechanisms to facilitate local currency trade.The MoU, the first of its kind, is aimed at putting in place a Local Currency Settlement System (LCSS) to promote the use of INR and AED bilaterally. It covers all current account transactions and permitted capital account transactions. (Isse Rupee-Dirham ki foreign exchange market develop hogi). It will enable the development of an INR-AED foreign exchange market.
 

What is the provision around the system of payments?

Currently, India pays for UAE oil in dollars.RBI last year announced a framework for settling global trade in rupees called Special Rupee Vostro Account. The bilateral trade can take place accordingly. The two countries also agreed to set up a real-time payment link to facilitate easier cross-border money transfers. The two central banks agreed to link India's Unified Payments Interface (UPI) and UAE's Instant Payment Platform (IPP).
 

Tell me about the economic importance of UAE to India

☛ India has a India-UAE Comprehensive Economic Partnership Agreement (CEPA) since 2022.
☛ Bilateral trade last financial year was US$ 84.5 billion of which Indian exports to the UAE were over US$ 31 bn
☛ In 2022-23, foreign direct investment (FDI) from the UAE to India stood at $3.35 billion.
☛ There are 2.80 million Indians in the UAE out of its total population of 10 million.
☛ United Arab Emirates’ (UAE) accounts for 20% of the total remittances in India, next only to the USA.


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