In a significant move to strengthen economic ties, India and the United Arab Emirates have signed a historic Memorandum of Understanding on the Local Currency Settlement (LCS) system. This groundbreaking agreement, signed between the Reserve Bank of India and the Central Bank of the UAE, aims to revolutionize cross-border transactions between the two nations.
The LCS system allows for the use of the Indian Rupee and UAE Dirham in bilateral trade, marking India's first-ever LCS arrangement. This innovative system is expected to have a transformative impact on transaction costs and processing time while also increasing reliance on local currencies. The agreement comes as a significant milestone in the rapidly evolving India-UAE relationship, in line with the Vision Statement unveiled by the two leaders during their virtual summit in February 2022.
Under the LCS system, traders and businesses will have the flexibility to choose the payment currency based on mutual agreement, providing a seamless and efficient mechanism for cross-border transactions. This move is set to reduce dependence on international currencies and further strengthen economic cooperation between India and the UAE. Additionally, the LCS system enables the use of surplus balances in local currencies for investment in various local currency assets, such as corporate bonds, government securities, and equity markets, creating new avenues for growth and collaboration.
The signing of the LCS agreement took place during the recent visit of Honorable Prime Minister Shri Narendra Modi to the UAE. Prime Minister Modi was warmly welcomed by HH Sheikh Khaled bin Mohamed bin Zayed Al Nahyan, the Crown Prince of Abu Dhabi, further reflecting the depth of bilateral relations between the two countries. This significant step is expected to amplify the preferential terms already established by the Comprehensive Economic Partnership Agreement (CEPA), bringing new opportunities for trade and investment.
The implementation of the LCS system has already demonstrated its potential with a noteworthy transaction during the visit. In the first transaction under the newly implemented LCS system, a leading UAE gold exporter invoiced the sale of 25 kg of gold, valued at approximately 12.84 crore Rupees. Gold, gems, and jewelry are the second most traded commodities between India and the UAE. Last year, the two-way trade between India and the UAE was worth US$ 20 billion, accounting for about 42% of the total non-oil trade between the two countries.
This landmark agreement signifies not only the deepening economic ties between India and the UAE but also sets a precedent for other countries to explore local currency settlement mechanisms. The LCS system is anticipated to have a ripple effect on global economic engagements, encouraging the use of local currencies and fostering greater financial independence.
