India and the UAE have forged ahead with a Local Currency Settlement System (LCSS), marking a pivotal shift in their economic collaboration. This pioneering initiative enables bilateral trade transactions to occur directly in Indian Rupees and UAE Dirhams, reducing dependence on the US Dollar. By cutting transaction costs and accelerating settlement times, LCSS sets the stage for a more agile and cost-effective trade ecosystem between these dynamic economies.
Breaking Down Local Currency Settlement System
The Local Currency Settlement System (LCSS) is a bilateral agreement between nations aimed at boosting cross-border transactions and economic ties.
Domestic Currency Transactions: LCSS allows exporters and importers from both countries to conduct business using their own currencies—Indian Rupees and UAE Dirhams. This eliminates the need for conversions into a third currency like the US Dollar.
Cost and Time Efficiency: By bypassing intermediary currencies, the Local Currency Settlement System(LCSS) reduces transaction costs significantly. It also speeds up processing times, making transactions more efficient for businesses.
Flexibility in Payment Currency: Traders under LCSS have the flexibility to choose whether to pay or receive payments in Indian Rupees or UAE Dirhams, depending on what suits them best for each transaction.
India and the UAE are improving financial connectivity with the integration of India’s Unified Payments Interface (UPI) and the UAE’s Instant Payment Platform (IPP). This partnership allows fast secure, and cost-effective cross-border transfers between the two countries. By linking card switches, they also ensure that domestic cards are accepted mutually, simplifying transactions for users. Supported by agreements signed by the RBI and the Central Bank of UAE, this collaboration aims to further streamline payments by exploring integration between India’s Structured Financial Messaging System (SFMS) and UAE’s messaging system.
Economic benefits
- Reduced Transaction Costs: Direct transactions in Indian Rupees and UAE Dirhams minimize the average two percent transaction cost currently incurred by Indian exporters to the UAE.
- Elimination of Foreign Exchange Requirements: LCSS removes the need for foreign currency exchanges, reducing additional costs and complexities for small and medium exporters.
- Improved Transparency and Efficiency: LCSS promotes greater price transparency and quicker settlement times, streamlining trade processes and enhancing economic cooperation.
- Support for Small Businesses: The system supports inclusivity by allowing smaller players to participate more effectively in international trade.
Local Currency Settlement System impact and Market boost
The Local Currency Settlement System (LCSS) holds the potential to significantly boost the UAE’s food security goals and position it as a regional manufacturing hub. Indian companies could establish operations to target the GCC market under this system. The initiative particularly benefits small and medium enterprises (SMEs), aligning with the UAE’s focus on developing the MSME sector. Initially, LCSS will prioritize larger corporations to ensure stability before expanding to smaller businesses, recognizing the need for gradual adoption due to initial complexities. This strategic approach aims to enhance economic collaboration and competitiveness between India and the UAE.