India, UAE to settle cross-border transactions in rupees, dirhams

India and the United Arab Emirates (UAE) have struck a deal to promote the use of rupees and dirhams for cross-border transactions as Prime Minister Narendra Modi called on UAE ruler and President Sheikh Mohamed Bin Zayed Al Nahyan last week.

Modi visited the UAE, his fifth tour of the Gulf Arab nation since he assumed office in 2014, on his return from France after attending the Bastille Day parade in Paris as the chief guest.

The leaders also signed an agreement to establish a campus of the Indian Institute of Technology in Abu Dhabi.

“It is always gladdening to meet HH Sheikh Mohamed bin Zayed Al Nahyan. His energy and vision for development are admirable. We discussed the full range of India-UAE ties including ways to boost cultural and economic ties,” Modi wrote on Twitter.

Both sides talked about collaborating on payment systems to make international transactions between the two countries faster and more efficient. The collaboration will also involve linking their national card payment networks and allowing for the acceptance of each country’s domestic cards.

Ministry of external affairs spokesperson Arindam Bagchi tweeted, “Discussions touched upon a broad range of areas of bilateral cooperation including trade and investment, fintech, energy, renewables, climate action, higher education and people to people ties.”

India’s foreign secretary, Vinay Kwatra, said: “The visit is of tremendous strategic significance for many reasons. It underscores the deep bond of friendship and trust between the honorable PM and the President of the UAE. India and the UAE had signed the Comprehensive Economic Partnership Agreement (CEPA) last year. And since the signing of that important strategic landmark agreement, the trade and economic partnership agreement has grown significantly between the two countries.”

India-UAE trade rose to $85 billion in 2022, making the UAE India’s third-largest trading partner for the year 2022-23 and India’s second-largest export destination. India is the UAE’s second largest trading partner.

In February 2022, India became the first country with which the UAE signed the CEPA. Bilateral trade has increased by about 15% since the CEPA came into effect on 1 May 2022.

Reserve Bank of India governor Shaktikanta Das and Central Bank of UAE governor Khaled Mohamed Balama signed the agreements to settle trade in local currencies and the interlinking of the payment and the messaging systems of the two countries in Abu Dhabi.

A statement said the agreement 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) that will cover all current account transactions and permit capital account transactions.

“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 optimize transaction costs and settlement time for transactions, including for remittances from Indians residing in UAE,” the statement said.

The two central banks also agreed to cooperate on linking their fast payment systems (FPSs) – Unified Payments Interface (UPI) of India with Instant Payment Platform (IPP) of UAE; linking the respective card switches (RuPay switch and UAESWITCH); and linking of payments messaging systems – Structured Financial Messaging System (SFMS) of India with the messaging system in the UAE.

The UPI-IPP linkage will help users in either country make fast, convenient, safe, and cost-effective cross-border funds transfers. The linking of Card Switches will facilitate mutual acceptance of domestic cards and processing of card transactions. The linkage of messaging systems is aimed to facilitate bilateral financial messaging between the two countries, the statement added.

On the significance of the settlement of trade in local currencies and the interlinking of the payment and the messaging systems of the two countries, Kwatra said: “These put together important segments of the ecosystem in economic engagement and brings about ever increasing greater strategic economic convergence between the economies of India and the UAE. It reduces the transaction time and transaction costs. It essentially ensures an enormous ease of business at the level of trade between the two countries. And if one were to combine that with the benefits of the benefits accruing to the two economies from last year’s CEPA, the agreement signed today will be of great significance.”

“In many ways, looking ahead, the visit will open up new pathways for India to look at structuring a similar partnership with other countries both in the region and beyond,” he added.

India and the UAE have also reiterated their resolve to further strengthen investment ties between the two countries.

A joint statement issued after the meeting said: “In this context, they appreciated the efforts of the bilateral high-level joint task force on investments. They acknowledged that the UAE became the fourth largest investor in India in 2022-23, compared to the seventh in 2021-22. They appreciated the plan of Abu Dhabi Investment Authority (ADIA) to set up a presence in Gujarat International Finance Tec-City (GIFT City), a financial free zone in Gujarat, in the next few months. This will further facilitate investment opportunities for the UAE in India.”

Academic programs, including a host of bachelor’s, master’s and Ph.D. programs, at the IIT Delhi-Abu Dhabi campus are expected to commence in 2024. Research centers related to sustainable energy and climate studies, as well as computing and data sciences are also expected to come up at the campus.