Note4Students
From UPSC perspective, the following things are important :
Prelims level: Local Currency Settlement System (LCSS)
Mains level: Read the attached story
Central Idea
- India and the United Arab Emirates (UAE) signed a pact during PM Modi’s visit to Abu Dhabi.
- It established a framework for promoting the use of the Indian rupee (INR) and UAE Dirham (AED) in cross-border transactions.
Local Currency Settlement System (LCSS)
- LCSS Establishment: The framework aims to establish a Local Currency Settlement System (LCSS) between India and the UAE.
- Domestic Currency Transactions: LCSS enables exporters and importers to invoice and pay in their respective domestic currencies.
- Foreign Exchange Market Development: LCSS facilitates the development of an INR-AED foreign exchange market.
- Transaction Optimization: The use of local currencies optimizes transaction costs and settlement time.
- Remittance Benefits: LCSS benefits remittances from Indians residing in the UAE.
Interlinking of Payment Systems: UPI-IPP Linkage
- Payment System Linkage: The Memorandum of Understanding (MoU) includes the linking of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP).
- Card Switches and Messaging Systems: It explores linking the card switches (RuPay switch and UAESWITCH) and messaging systems of both countries.
- Efficient Cross-Border Fund Transfers: UPI-IPP linkage facilitates fast, convenient, safe, and cost-effective cross-border fund transfers.
- Mutual Acceptance of Domestic Cards: The agreement enables the mutual acceptance of domestic cards and processing of card transactions.
Impact of the Move
- Trade boost: Bilateral trade between India and the UAE reached around $85 billion in FY23.
- Exchange Rate Risk Management: The agreement helps Indian exporters’ hedge exchange rate risks in rupee-based trade.
- Internationalization of the Rupee: It supports India’s efforts to internationalize the rupee and reduce dependence on the US dollar.
- Interest from Other Countries: Countries in Africa, the Gulf region, Sri Lanka, and Bangladesh have shown interest in trading in rupee terms.
Significance for Exporters
- Denominating in Local Currencies: Denominating export contracts and invoices in local currencies minimizes exchange-rate risks and aids in competitive pricing.
- Enhanced Cooperation: Enhanced cooperation between the banking systems of India and the UAE supports trade and economic activity.
- Major Export Categories: Major Indian exports to the UAE include mineral fuels, pearls, precious stones, electrical machinery, and equipment.
- Trade Growth and Destination: The UAE is India’s second-largest export destination, and India-UAE trade reached $85 billion in 2022.
Benefits for Remittances
- Reduced Transaction Costs: The agreement reduces high transaction costs and exchange rate margins associated with remittances.
- Affordable and Efficient Remittances: It makes remittances more affordable and efficient, particularly for low-wage earners.
- Increased Remittance Inflows: In 2022, India experienced a 24.4% increase in remittances to $111 billion, accounting for 3.3% of GDP.
- Contribution of GCC Countries: Remittance inflows from Gulf Cooperation Council (GCC) countries contribute significantly to India’s total remittance inflows.
Larger Impact
- Reducing Dollar Dependence: The agreement promotes the use of local currencies, reducing dependence on the US dollar in international transactions.
- Strengthening Economic Ties: Strengthened economic ties between India and the UAE encourage investments, remittances, and trade growth.
- Rupee Internationalization: The agreement aligns with India’s goal of internationalizing the rupee and expanding its global acceptance.
- Similar Cross-Border Efforts: Similar efforts, such as collaboration with Singapore’s PayNow, have been undertaken to facilitate cross-border transactions.
Conclusion
- The agreement positively impacts bilateral trade, facilitates remittances, and supports India’s goal of internationalizing the rupee.
- By reducing transaction costs and enhancing financial connectivity, the agreement strengthens economic relations between India and the UAE, fostering trade growth and cooperation.
Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024