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India and UAE Currency exchange to facilitate Trade

Published: 20th Jul, 2023


During Prime Minister Narendra Modi's recent visit to the UAE, the Reserve Bank of India (RBI) and the Central Bank of the UAE signed two MoUs to promote local currency use in cross-border transactions and interlink payment systems, fostering economic cooperation.

Key-highlights of the Agreement:

  • Background: The step was taken in line with the emerging future threats of dollar dominance, currency manipulation and Russia’s sanctions.
  • The first aims to encourage the use of local currencies (rupee and dirham) for cross-border transactions, promoting economic cooperation between the two nations.
  • The second is focused on linking their payment systems, facilitating smoother financial transactions between India and the UAE.
  • Significance:
    • Such cooperation will also include the mutual acceptance of domestic card schemes by interlinking national card switche.
    • Integration between these systems will enhance access to payment services for the benefit of the citizens and residents of the two countries.
  • Other points of discussion:
    • The agenda of the groupings such as the I2U2 (India, Israel, UAE and USA) and the UAE-France-India trilateral cooperation under which both sides are in collaboration with other powers.
    • Also, the two leaders also witnessed the signing of a MoU on establishing a branch of the Indian Institute of Technology-Delhi in Abu Dhabi.

How currency exchange helps in Trade facilitation?

  • Easy documentation: Trade facilitation covers the full spectrum of border procedures, from the electronic exchange of data about a shipment, to the simplification and harmonisation of trade documents, to the possibility to appeal administrative decisions by border agencies.
  • Fixed rate of transaction: Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.
  • A lower-valued currency makes a country's imports more expensive and its exports less expensive in foreign markets.
  • A higher exchange rate can be expected to worsen a country's balance of trade, while a lower exchange rate can be expected to improve it.

How exchange rate affects Trade?

  • An increase in exchange rates reduces the balance of trade in a country by reducing exports and increasing imports.
  • If a country's imports are valued higher than their exports, the country is said to have a trade deficit and a lower demand for their currency. This drives the currency exchange rate down.

India’s step in similar lines:

  • According to reports, 18 countries have agreed to trade in Indian rupees.
  • These 18 nations include Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda and the United Kingdom.
  • These agreements mean that the Indian rupee can be used for trade transactions between the countries involved, rather than relying solely on the US dollar.

Why domination of US Dollar is concernable?

The domination of the US Dollar is concernable for several reasons:

  • Economic Vulnerability: Countries relying heavily on the US Dollar for trade and reserves are susceptible to fluctuations in its value, which can impact their own economies.
  • Global Financial Stability: As the world's primary reserve currency, the Dollar's fluctuations can create volatility in international financial markets, affecting global stability.
  • Trade Imbalances: Countries with weaker currencies may find it harder to export and compete in the international market.
  • Dependency on US Policies: Countries using the Dollar as a major currency may become subject to the monetary policies and decisions of the US Federal Reserve, which may not align with their own economic needs.
  • Geopolitical Influence: The US can use its currency's dominance as a tool for exerting geopolitical influence, leading to concerns over economic and political sovereignty for other nations.
  • Dollarization Risks: Some countries may fully adopt the US Dollar as their official currency, relinquishing control over their monetary policies and economic autonomy.

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