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Describing the MoUs signed with UAE on Saturday as an important aspect of cooperation between the two nations, PM Narendra Modi said, “It paves the way for enhanced economic collaboration and will make international financial interactions simpler. Our bilateral trade has grown by 20%. ”
The first of these MoUs, signed by RBI governor Shaktikanta Das with his UAE counterpart Khaled Mohamed Balama, is seen as aimed at shielding traders from both sides from fluctuations in exchange rate, while creating a window for Emirati companies to invest in India given that the UAE has a trade surplus with India. The UAE is among India’s top three trading partners and is home to many Indian workers, besides being a major destination for Indian tourists.
The steps come amid a move towards de-dollarisation in the wake of the Russia-Ukraine conflict, which has forced countries to look at alternative payment channels to keep trade lines flowing. According to industry sources, a large part of India’s trade with Russia is being settled in dirhams. Separately, the government and RBI are also trying to internationalise the rupee and had, on last count, 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.
“Creation of the Local Currency Settlement System (LCSS)… would enable the development of an INR-AED [UAE 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 fromIndians residing in the UAE,” the RBI said.
The agreement covers all current account transactions and permitted capital account transactions. “This arrangement would also promote investments and remittances between the two countries,” RBI added.
Typically, under such deals, a swap arrangement is worked out and the two central banks periodically settle the surplus at a fixed exchange rate, helping cushion traders from exchange rate risks. China had used over three dozen bilateral agreements to internationalise the yuan, industry sources said.
“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,” said Ajay Sahai, DG & CEO at industry body Federation of Indian Export Organisations.
The second MoU dealt with ‘Payments and Messaging Systems’ and 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 — RuPayswitch 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 bank to bank, 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 the linking of payments messaging systems — the Structured Financial Messaging System (SFMS) of India with the messaging system in the UAE.
Following the sanctions, Russia has been relying on an alternative switching arrangement to undertake overseas transactions, prompting other governments and central banks to also think of similar arrangements.
The UPI-IPP linkage will enable users in either country to make fast, convenient, safe and cost-effective crossborder funds transfers. Similarly, linking the respective card switches will facilitate the mutual acceptance of domestic cards and the processing of card transactions.
The first of these MoUs, signed by RBI governor Shaktikanta Das with his UAE counterpart Khaled Mohamed Balama, is seen as aimed at shielding traders from both sides from fluctuations in exchange rate, while creating a window for Emirati companies to invest in India given that the UAE has a trade surplus with India. The UAE is among India’s top three trading partners and is home to many Indian workers, besides being a major destination for Indian tourists.
The steps come amid a move towards de-dollarisation in the wake of the Russia-Ukraine conflict, which has forced countries to look at alternative payment channels to keep trade lines flowing. According to industry sources, a large part of India’s trade with Russia is being settled in dirhams. Separately, the government and RBI are also trying to internationalise the rupee and had, on last count, 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.
“Creation of the Local Currency Settlement System (LCSS)… would enable the development of an INR-AED [UAE 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 fromIndians residing in the UAE,” the RBI said.
The agreement covers all current account transactions and permitted capital account transactions. “This arrangement would also promote investments and remittances between the two countries,” RBI added.
Typically, under such deals, a swap arrangement is worked out and the two central banks periodically settle the surplus at a fixed exchange rate, helping cushion traders from exchange rate risks. China had used over three dozen bilateral agreements to internationalise the yuan, industry sources said.
“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,” said Ajay Sahai, DG & CEO at industry body Federation of Indian Export Organisations.
The second MoU dealt with ‘Payments and Messaging Systems’ and 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 — RuPayswitch 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 bank to bank, 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 the linking of payments messaging systems — the Structured Financial Messaging System (SFMS) of India with the messaging system in the UAE.
Following the sanctions, Russia has been relying on an alternative switching arrangement to undertake overseas transactions, prompting other governments and central banks to also think of similar arrangements.
The UPI-IPP linkage will enable users in either country to make fast, convenient, safe and cost-effective crossborder funds transfers. Similarly, linking the respective card switches will facilitate the mutual acceptance of domestic cards and the processing of card transactions.
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