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18th July 2023 (7 Topics)

Eye on Emirati ?ows

Context:

The Reserve Bank of India (RBI) and the Central Bank of the UAE has agreed to establish a framework for enabling the use of the two countries’ local currencies for cross border transactions.

Major Highlights of this MOU:

  • Permitted Transaction- As per the memorandum of understanding between the two central banks, all current account payments and certain “permitted” capital account transactions could be settled using either the rupee or the dirham.
  • Reducing the dependence on a third country’s currency-The Indian rupee and the UAE dirham is aimed at promoting their use bilaterally, thus reducing the dependence on a third country’s currency such as the U.S. dollar
  • Local Currency Settlement System- To facilitate settlement, the two banks are set to put in place a Local Currency Settlement System.

Benefits:

  • Rupee ­dirham foreign exchange - The settlement mechanism would be the development of a rupee ­dirham foreign exchange market that would help in pricing the two currencies independent of their exchange rates with other currencies.
  • No need to factor in exchange rate risks- Indian and Emirati businesses would not need to factor in exchange rate risks when quoting to supply goods or services to buyers in the other country.
  • Precursor for other bilateral currency accords -The India­ UAE local currency settlement system could also potentially serve as a precursor for other bilateral currency accords

Measures for effective implementation:

  • Stepped up investment- One possibility, as the RBI indicated, was stepped up investment by UAE­based ?rms.
  • Extent of adoption- While the idea is laudable, its actual success will hinge on the extent of adoption by businesses in both nations.
  • Deploy remunerative avenues- Emirati businesses need to see remunerative avenues to deploy the potential rupee ?ows should they opt to receive payments in the Indian currency.
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