How do traders, NRIs benefit from new UAE-India MoUs?

The path-breaking agreements signed by the UAE and India on Saturday in Abu Dhabi in the presence of the President, His Highness Sheikh Mohamed bin Zayed Al Nahyan and Prime Minister Narendra Modi will have a far-reaching consequential impact on the trade and transactional ecosystem of the two nations and strengthen economic engagement.

The launch of dirham-rupee trade settlement and the setting up of a real-time interlinking payment and messaging system for faster cross-border transactions allow exporters and importers from either side to invoice and pay in their respective domestic currencies and shield them from fluctuations in exchange rate, while facilitating a window for cross-border investment.

The new arrangements will help boost 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, currency market pundits said.

Governor of the Central Bank of UAE (CBUAE), Khaled Mohamed Balama, and Shaktikanta Das, the governor of the Reserve Bank of India (RBI) signed the Memorandum of Understanding (MoU) for establishing the game-changing framework to promote the use of local currencies for cross-border transactions.

The MoU, putting in place a local currency settlement system (LCSS), covers all current account transactions and permitted capital account transactions. The creation of the LCSS would enable exporters and importers to invoice and pay in their respective domestic currencies, which in turn would enable the development of an dirham-rupee foreign exchange market.

The strategic initiatives come amid a move towards de-dollarisation in the wake of the Russia-Ukraine conflict, which has forced several countries to look at alternative payment channels to keep trade lines flowing. The UAE is India’s fourth largest supplier of crude oil and the second largest provider of LPG and LNG, which makes de-dollarisation particularly significant.

Describing the agreements, which also included an MoU between India’s education ministry and Abu Dhabi authorities for setting up the new IIT Delhi campus, as pivotal to bolstering cooperation between the two nations in areas such as trade, energy and climate action, Modi said they would pave the way for enhanced economic collaboration and will make international financial interactions simpler.

“Our bilateral trade has grown by 20 per cent. For the first time, we have achieved $85 billion trade and soon we will achieve the target of $100 billion. If we decide, we can cross this milestone before the G20 summit,” the Indian prime minister tweeted.

Soon after the new trade settlement system was adopted, the first deal was transacted in the form of 25kg gold exported to YES Bank in Mumbai for a rupee payment of Rs128. 4 million. “Congrats to Peekay Intermark Ltd. & (and) @YESBANK for being the 1st users for settling their gold transaction in INR under the newly set up Local Currency Settlement system (between India and the UAE),” the Indian diplomatic mission in Abu Dhabi tweeted.

“By dealing in local currencies, risk of exchange rates can be avoided. Trading in local currencies also expedites the settlement process besides boosting two-way trade with the partner country with stability and transparency. This will be an icing on the cake for exploiting the opportunities offered by the India-UAE Comprehensive Economic Cooperation Agreement (Cepa),” said Ajay Sahai, DG & CEO at industry body Federation of Indian Export Organisations.

The trade and economic partnership between the two countries has grown significantly since they signed the Cepa in 2022, foreign secretary Vinay Kwatra said. The two agreements on settlement of trade in domestic currencies and interlinking payment systems pave the way for increasing strategic economic convergence between the two sides, he said. “The visit opens up new pathways to structuring similar arrangements with other countries in the region and beyond,” he added.

In the wake of the Russia-Ukraine conflict, a large part of India’s trade with Russia was being settled in dirhams. The government and RBI have also been trying to internationalise the rupee and had so far allowed 60 banks from 18 countries to settle transactions in rupee through a special account. The MoU with the UAE takes the initiative a step further.

The MoU dealing with ‘payments and messaging systems’ includes linking the fast payment systems (FPSs) — unified payments interface (UPI) of India with the instant payment platform (IPP) of the UAE. It also envisages linking the respective payment card switches — RuPay switch and UAESWITCH.

“RBI has developed the SFMS messaging network and the UAE has one of their own. The idea is that for all transaction settlement between banks, the messaging will be done through this and there is no need to go through SWIFT,” the RBI governor said. This is seen as a foundation to creating an alternative to SWIFT as the two central banks have also agreed to explore.

6. Increased financial inclusion: The settlement agreement can promote financial inclusion by providing easier access to banking services for NRIs and other individuals involved in trade and investment between the UAE and India. This can contribute to the overall economic development of both countries.