The UAE has become the latest country to agree with India to use domestic currencies for conducting cross-border transactions instead of US-dollar payments channelled through the SWIFT network.

The agreement is expected to lead to the widespread use of letters of credit (L/Cs) in Indian rupee (INR) and the UAE dirham being used for trade between the two countries.

Integrated systems

During the Indian Prime Minister Narendra Modi's visit to the UAE earlier this month, the two countries signed agreements to settle trade in local currencies without needing to convert them to US dollars. The two countries also agreed to link card switch systems and payment messaging systems.

The mechanisms for connecting and integrating India's Structured Financial Messaging System (SFMS) with the UAE's Local Currency Settlement System messaging system to operationalise domestic currency trading are reportedly under development.

Chairman of the Institute of Chartered Accountants of India, Harikishan Rankawat, told the Khaleej Times that Indian importers will be able to use these systems to open L/Cs in Indian rupees instead of US dollars. "It will help traders to earn predetermined margins by avoiding foreign exchange fluctuations," he told the Dubai-based newspaper.

Promoting India's currency

New Delhi has been promoting the use of INR-denominated transactions for several reasons, including the depreciation of the Indian currency against the US dollar. Countries that have expressed an interest in INR-denominated trading include the UK, Germanyand Singapore while Sri Lanka is already executing Indian rupee transactions.

Bangladesh and India earlier this month commenced trading in Indian rupee with L/Cs featuring in the first transactions that were announced at an inaugural event in the capital of Bangladesh, Dhaka (DC World News, 12 July 2023).

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.