Today, we delve into a significant development in international trade and finance that promises to reshape economic relations between India and the UAE. The introduction of the Local Currency Settlement System, or LCSS, is set to revolutionize how transactions are conducted between these two vibrant economies.
In a landmark move during a visit by Indian Prime Minister Narendra Modi last year, India and the UAE laid the groundwork for a Local Currency Settlement System. During the PM’s visit, the Reserve Bank of India and the Central Bank of the UAE signed a Memorandum of Understanding to this effect. This LCSS system will allow exporters and importers to invoice and pay for goods and services in their respective domestic currencies-Indian Rupees and UAE Dirhams. This step reduces dependency on intermediary currencies like the US Dollar, thereby cutting down transaction costs and settlement times.
At a high-profile event held at the Taj Dubai last week, the Indian Business and Professional Council, the National Payments Corporation of India, and the Reserve Bank of India came together to discuss the far-reaching implications of this system. During this conclave, Radha Shyam Ratho, Executive Director of the RBI, emphasized that integrating India’s advanced Unified Payments Interface (UPI) with the UAE’s payment infrastructure will create a seamless, transparent, and cost-effective financial ecosystem.
What does the LCSS mean for businesses and consumers? For one, it simplifies the process of cross-border transactions, making it easier and cheaper to do business between the two countries. The elimination of intermediary currency conversion will significantly reduce costs. For industries like gold, gems, and jewelry-major trade commodities between India and the UAE can translate to substantial savings and efficiency. The MOU signed also includes plans to link domestic debit and credit card networks. This will enable direct processing of transactions, benefiting millions of Indian tourists who frequent the UAE, and enhancing their convenience and spending power. Currently, RuPay cards are already accepted in the UAE, and with the LCSS, more robust digital payment solutions are on the horizon. Initiatives are underway to facilitate UPI payments and integrate various financial messaging systems, ensuring secure and swift transactions.
Soon, the deployment of the RuPay Stack as a domestic card scheme called JAYWAN in the UAE is scheduled, with the customer roll-out beginning in July 2024 and additional features planned for October 2024. These initiatives collectively aim to strengthen India’s digital payment ecosystem, making it more convenient, secure, and efficient for retail customers and businesses. With efforts like integrating UPI with the Aani service to facilitate personal remittances and money transfers, and enabling bilateral acceptance of RuPay cards internationally, the future looks promising.
The strategic benefits of this system are profound. It supports the ambitious target of $100 billion in non-oil trade between India and the UAE by 2030. Additionally, reducing reliance on foreign currencies, enhances financial stability and provides a natural hedge against currency fluctuations. The LCSS framework offers several benefits apart from reducing seigniorage costs; LCSS also facilitates easier access to trade credit and export advances in partner currencies and greater economic and financial integration between India and the UAE.
The mutual acceptance of domestic card networks and the facilitation of direct card transactions without relying on international card networks not only benefits the residents and businesses in both countries but also enhances the ease of doing business for tourists and expatriates. For Indian tourists, who form the largest tourist demographic in the UAE, this means seamless transactions, fewer currency conversion hassles, and better financial transparency.
As of March 31, 2024, trade between India and the UAE stood at approximately $84 billion. With the comprehensive economic partnership agreement signed in 2022, the two nations are well on their way to achieving the $100 billion non-oil trade target by 2030. The UAE is India’s second-largest trading partner and the largest export destination, while India ranks as the UAE’s third-largest trading partner and second-largest export destination.
In essence, the Local Currency Settlement System is not just about easing transactions; it’s about fostering deeper economic integration, enhancing financial transparency, and building a resilient economic partnership. As we move forward, this initiative is expected to set a precedent for similar arrangements globally, highlighting the importance of innovative financial solutions in a globalised world.
Disclaimer: This press release is sourced from News On AIR, Prasar Bharti and Press Information Bureau India (PIB).
