Local Currency Settlement System

Local Currency Settlement System

• India and the United Arab Emirates (UAE) have signed a pact to establish a framework to promote the use of the rupee and UAE Dirham (AED) for cross-border transactions.
• “The MoU on establishing a framework for the use of local currencies for transactions between India and the UAE, aims to put in place a Local Currency Settlement System to promote the use of INR (Indian rupee) and AED (UAE Dirham) bilaterally,” the RBI said in a statement on July 15. 
• “The MoU covers all current account transactions and permitted capital account transactions,” the Indian central bank added. 

 What is LCSS ?

• The Local Currency Settlement System (LCSS) is a mechanism that enables cross-border transactions between two countries to be conducted in their respective domestic currencies.
• It allows exporters and importers to invoice and make payments in their local currencies, reducing the reliance on a third-party currency such as the US dollar.

Benefits of Local Currency Settlement System

• Foreign Exchange Costs and Dependency : An Indian exporter can invoice in INR, and a UAE importer can pay in AED, eliminating the need for currency conversion to a third-party currency like USD.
• Exchange Rate Risks : Companies can hedge exchange rate risks by transacting in local currencies, limiting losses caused by fluctuations in exchange rates.
• Improved Efficiency : Transaction processes can be streamlined as parties can invoice and settle payments in their domestic currencies, reducing complexities and time delays.
• Enhanced trade and investment opportunities : The use of LCSS promotes bilateral trade and investment between India and UAE by facilitating easier and more efficient cross-border transactions.
• Indian residents in the UAE can send remittances in INR, benefiting from lower transaction costs and faster settlement times.

India and UAE

• India-UAE trade was approximately USD 85 billion in 2022. UAE is India’s third-largest trading partner while India is UAE 2^nd largest trading partner.
• The two countries agreed to link India’s Unified Payments Interface (UPI) with UAE’s Instant Payment Platform (IPP).
• The two countries agreed to link their respective Card Switches vis-a-vis RuPay switch and UAESWITCH to enable mutual acceptance of domestic cards and processing of these card transactions.
• India’s Structured Financial Messaging System (SFMS) will be linked with messaging system in UAE to ease their financial messaging.
• Also, India will establish an IIT-Delhi campus in Abu Dhabi, which would be the second IIT abroad after Tanzania.

Practice Questions for Prelims

Consider the following statements:
1. India is UAE’s third largest trading partner
2. India will be establishing an IIT- Delhi campus in Abu Dhabi in the future.

Which of the above given statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans. b)

Mains Practice Question

What is a Local Currency Settlement System (LCSS)? How will the recent agreement between India and UAE benefit both the countries in terms of trade relationships as well as bilateral relations?

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