India, UAE to set up framework to settle transactions in local currencies

India has been looking to settle more of its trade with other countries in Indian rupees.

India and the United Arab Emirates (UAE) have signed a Memorandum of Understanding (MoU) to set up a framework to use their respective local currencies to settle bilateral transactions.

The MoU, signed by Reserve Bank of India (RBI) Governor Shaktikanta Das and Khaled Mohamed Balama, governor of the Central Bank of UAE, come amid Prime Minister Narendra Modi's visit to the West Asian nation.

"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 on July 15.

"The MoU covers all current account transactions and permitted capital account transactions," the Indian central bank added.

Prime Minister Modi tweeted that the MoU "pave the way for enhanced economic collaboration and will make international financial interactions simpler".

The signing of the MoU is India's latest move to increase the use of the rupee to settle international transactions. Over the last one year, Indian authorities have tried to push the use of the rupee globally, with the RBI announcing the setting up of a mechanism to settle global trade in rupees in July 2022.

Early use of this system was seemingly for the purchase of discounted oil from sanction-hit Russia following its invasion of Ukraine in February 2022. However, the mechanism has not taken off, with reports emerging that negotiations over settlement of bilateral trade in rupees between India and Russia had been suspended after Russia had accumulated billions of rupees in Indian banks which it could not use.

Instead, India continues to use US dollars to pay for the majority of its oil imports from Russia, with only a small portion being paid in a mix of currencies, including dirhams and the Chinese Yuan, Moneycontrol reported on July 14 quoting a government source.

In its statement on July 15, the RBI said the creation of a local currency settlement system with the UAE would allow traders to invoice and pay in their respective domestic currencies, which in turn would enable the development of a rupee-dirham foreign exchange market.

"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 the UAE," the RBI added.

The UAE was India's third-largest trade partner in 2022-23, with imports from the West Asian nation amounting to $53.23 billion and exports at $31.61 billion. The two countries have set a target of $100 billion of trade in non-petroleum products by 2030 from $48 billion at present.

India and the UAE had signed their Comprehensive Economic Partnership Agreement in May 2022.

Another UPI linkage

In addition to the MoU on rupee trade, India and the UAE have also signed a pact to link their fast payment systems. The linking of India's Unified Payments Interface (UPI) with the UAE's Instant Payment Platform (IPP) will help "users in either country to make fast, convenient, safe, and cost-effective cross-border funds transfers", the RBI said.

The prospective linking of the UPI with the UAE's IPP is the latest such international connection that India has put in place and comes close on the heels of Prime Minister Modi announcing in July during his visit to France that Indian tourists will be able to make rupee payments using UPI from atop the Eiffel Tower. Earlier this year in February, India and Singapore inked a pact to link the UPI and Singapore's fast payments system PayNow.

As part of the second MoU, India and the UAE have also agreed to co-operate in linking their Card Switches, namely RuPay switch and UAESWITCH, and consider the linking of payments messaging systems.

"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 RBI said.