The Reserve Bank of India (RBI) and the Central Bank of UAE (CBUAE) signed a memorandum of understanding (MoU) on 15 July, confirming the use of a new framework to utilise local currencies for cross-border trades.
Specifically, the dollar will be substituted for the Indian rupee (INR) and the UAE Dirham (AED) in cross-border transactions, effectively eliminating the need for double conversion costs.
Bilateral trade between India and AED was around $84.5 billion dollars in the last financial year.
Speaking to The TRADE, Shiva Subramaniam, head of credit emerging markets at Kepler Cheuvreux, highlighted that in terms of trade execution this move would work to create both a smoother and swifter settlement and save time thanks to the shorter time difference when compared with the US.
He added that trading in local currencies “avoids the quarter end and year end demand led costs for USD against emerging currencies like INR and can lead to increased bilateral investments and foster technological advancements.”
According to the RBI, a Local Currency Settlement System (LCSS) is set to be but in place to promote the bilateral use of these currencies.
Viraj Kulkarni, chief executive of PIVOT and member of the Bombay Chamber of Commerce MSME committee, told The TRADE: “Settling trade between the two countries in local currency as well as linking their payment platforms will significantly increase volumes and increase attractiveness and ease of doing business.”
A second MoU was also signed by the UAE and India earlier this week which is focused on connecting the payment messaging systems of the two countries.
Speaking to the significance of the MoUs, Subramaniam said: “The move strengthens economic diplomacy between the UAE and India, setting a positive example for other Gulf Cooperation Council (GCC) countries, and encourage similar currency arrangements and promote deeper economic cooperation in countries like Oman, Bahrain, Saudi Arabia and Kuwait.
“Overall, the shift towards trading in AED and INR signifies a strategic step in enhancing economic cooperation and strengthening ties between the UAE and India. It not only improves trade execution but also sets the stage for a more integrated and prosperous economic partnership in the region,” he added.