The Reserve Bank of India (RBI) and the Central Bank of UAE (CBUAE) signed two Memoranda of Understandings (MoUs) in Abu Dhabi on Saturday to establish a framework to promote settle bilateral trade in respective local currencies, that Indian Rupee and UAE Dirham (AED) and interlinking payments and messaging system.
The first MoU, which on establishing a framework for the use of local currencies for transactions between India and UAE, aims to put in place a Local Currency Settlement System (LCSS) to promote the use of INR and AED bilaterally.
“This will boost the trade between the two countries, it will be cost effective and the settlement will be much faster,” RBI governor said in an interview to state-run television channel Doordarshan.
The MoU covers all current account transactions and permitted capital account transactions.
Following the Russia-Ukraine war in 2022 and the sanctions imposed by western countries on Russia, the need was felt by many countries to reduce their dollar dependency for trade settlement. The INR trade settlement mechanism that was introduced by RBI in July last year was a move in that direction. Today’s initiative to settle bilateral trade in respective local currencies takes the process forward.
In a statement, RBI mentioned that 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 INR-AED 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 from Indians residing in UAE, according to the statement.
The second MoU on payments and messaging systems has three components.
The first one is to link each country’s Fast Payment Systems (FPSs) – India’s Unified Payments Interface (UPI) and UAE’s Instant Payment Platform (IPP). The UPI-IPP linkage will enable the users in both countries to make fast, convenient, safe, and cost-effective cross-border funds transfers, said RBI.
In February this year, a similar agreement was reached between RBI and the Monetary Authority of Singapore linking UPI and Singapore’s PayNow.
The second component is linking the respective card Switches RuPay and UAESwitch. The linking of Card Switches will facilitate mutual acceptance of domestic cards and processing of card transactions.
“In other words domestically issued credit cards like our Rupay and cards issued by the UAE banks, they can be settled through a direct messaging system and no need to use the international card network,” said Das.
Third component is to have a direct messaging system between India and UAE, by linking India’s India’s Structured Financial Messaging System (SFMS), with the UAE’s messaging system. The linkage of messaging systems is aimed to facilitate bilateral financial messaging between the two countries, bypassing the SWIFT messaging system.
“For all transaction settlement, the messaging from bank to bank, both sides will be done through these messaging systems. There will not be any necessity or need to depend on the SWIFT messaging system which has been used so far,” the said RBI governor.
The Society for Worldwide Interbank Financial Telecommunications, or SWIFT is a vast and secure messaging system that allows banks and other financial institutions from all around the world to send and receive encrypted information on cross-border money transfer.