In a significant development during Prime Minister Modi's fifth visit to the UAE, the two nations have signed an agreement to trade using local currencies. This agreement marks a pivotal step in the economic relations between India and the UAE.
The local currency trade agreement involves the exchange of Indian Rupees (INR) and Emirati Dirhams (AED) for bilateral trade between the two countries. This arrangement allows businesses and individuals to conduct transactions using their respective local currencies, bypassing the need for international currencies such as the US Dollar. Essentially, this means Indians can pay for imports using INR, while UAE residents can utilize AED for their purchases.
The Memorandum of Understanding (MoU) between the Reserve Bank of India (RBI) and the Central Bank of the UAE establishes a Local Currency Settlement System (LCSS). This system promotes the bilateral use of INR and AED, covering all current account transactions and permitted capital account transactions. The MoU aims to develop an INR-AED foreign exchange market, enhancing financial collaboration between the two nations.
Although India currently pays for UAE oil in dollars, the RBI introduced a framework last year for settling global trade in rupees through the Special Rupee Vostro Account. The bilateral trade can proceed under this framework. Additionally, the two countries have agreed to establish a real-time payment link, facilitating easier cross-border money transfers by linking India’s Unified Payments Interface (UPI) with UAE’s Instant Payment Platform (IPP).
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