India-UAE deal to trade with rupees
Context:
- The Reserve Bank of India (RBI) and the Central Bank of the UAE, which has its headquarters in Abu Dhabi, recently signed two memorandums of understanding (MoUs) during Prime Minister Narendra Modi’s visit to the UAE. The other sought to integrate payment systems, while the former built a framework to encourage the use of local currencies for cross-border transactions.
Encouragement of regional currencies:
- The RBI predicts that the ability of exporters and importers to submit invoices and make payments in their respective national currencies will lead to an increase in the INR-AED foreign currency market.
- In principle, the arrangement would assist in reducing transaction costs and accelerating the settlement of transactions, particularly remittances from Indians residing in the UAE.
Regarding exporters:
- When export contracts and invoices are issued in the local currency, exchange-rate risks are lessened (such instance when a third currency is used as the benchmark), which increases the likelihood of obtaining competitive pricing.
- Additionally, it might open up new opportunities for collaboration between the banking systems of the two nations, boosting commerce and economic activity in both.
- Mineral fuels, oils and products, bituminous materials, and mineral waxes are India’s top exports to the UAE, followed by pearls, precious stones and metals, electrical gear and equipment, and other commodities.
- The majority of India’s imports are crude petroleum and petroleum-related goods.
- In 2022, trade between India and the UAE will total $85 billion. Additionally, in FY2022-23, the UAE was India’s second-largest export market and third-largest trading partner. But India was the UAE’s second-largest trading partner.
The payment system is integrated:
- The second of the two MoUs connects the UAE’s Instant Payment Platform (IPP) and India’s Unified Payments Interface (UPI).
- Additionally, a link has been established between the RuPay card switches and UAESWITCH. Card changers make it easier for different payment service providers to communicate and transact with one another.
- The deal will take into account tying the two nations’ financial messaging systems together.
- The UPI-IPP link would allow customers in any country to conduct quick, simple, secure, and affordable cross-border financial transfers, according to India’s top banking regulator.
- Card swaps, according to the regulator, will make it easier for people to accept domestic cards from one another and complete card transactions.
- For the 3.5 million Indian nationals who live in the UAE, this is significant.
The significance:
- The astronomical transaction fees are just one of the many problems with sending remittances home, particularly for individuals with low salaries.
- According to the 2023 Migration and Development Brief from the World Bank, India’s remittances reached $111 billion in 2022, a 24.4% rise from the year before.
- In this case, the GDP was 3.3%. It went on to forecast that remittance inflows from GCC (Gulf Cooperation Council) countries, which currently make up around 28% of all inflows to the country, would increase in 2022.
- The governments of the GCC countries took deliberate attempts to curb the inflation of food costs, even as rising energy prices helped the employment and wages of the less-skilled Indian migrants living in the GCC countries.
- High-skilled and largely high-tech Indian migrants in the U.S., the U.K., and Singapore contributed about 36% of the remittances.
Conclusion:
- Continued cooperation between India and the UAE in industries including technology, renewable energy, infrastructure development, tourism, and healthcare could improve their bilateral relations.
