Intent to not lag China is behind moves to promote INR trade

During the visit of our Prime Minister to the United Arab Emirates (UAE), the chiefs of the Reserve Bank of India and the Central Bank of UAE signed two memoranda of understanding (MoU) establishing a framework to promote the use of local currencies viz. the Indian rupee (INR) and the UAE dirham (AED) for cross-border transactions and cooperation for interlinking their payment and messaging systems. Over a period of time, progress in translating these intentions into practical reality can help the individuals who want ease and convenience for their small-value transactions regardless of the costs. Under the MoU on ‘Payments and Messaging Systems’, the two central banks agreed to cooperate on linking their fast payment systems (FPSs)—Unified Payments Interface (UPI) of India with Instant Payment Platform (IPP) of UAE — and linking the respective ‘card switches’ (RuPay switch and UAESWITCH). The UPI-IPP linkage will enable the users in both countries to make fast, convenient, safe, and cost-effective cross-border funds transfers, says the RBI. 
 

The linking of ‘card switches’ will facilitate mutual acceptance of domestic cards and processing of card transactions. India and Singapore have already linked their fast payment systems UPI and PayNow allowing transfer from/to India up to Rs. 60,000 per day. Such arrangements make life easy and convenient for individuals, whether for their needs as tourists or for person to person remittances.  
 

For trade transactions and inward remittances, the option of transacting in INR through the Vostro accounts that UAE banks and exchange houses maintain with Indian banks has been available for decades. 
 

For building the balances in the Vostro accounts, the foreign banks remit freely convertible currency. The settlements and exchange rates for such currencies have to be worked out through US dollars because there is no active foreign exchange market for INR or AED with any currency other than the US dollar. So, the MoU aims to put in place a local currency settlement system (LCSS) to promote the use of INR and AED bilaterally and to develop an AED-INR market over a period of time. If that does happen, the INR-AED market is likely to be relatively shallow. 
 

The global oil trade is mostly in US dollars. Also, trade and investment flows constitute a minuscule part of global speculative flows that influence not only the demand and supply of currencies that determine the foreign exchange rates, but also the forward premiums or discounts and the markets for sophisticated products like futures, options and so on.

When Russia invaded Ukraine last year, the United States threw some Russian banks out of SWIFT (Society for Worldwide Interbank Financial Transactions), the global inter-bank messaging platform.
 

 Since then, some countries including China and India have been trying to increase trade in their own currencies and integrating their own settlement platforms with that of some other countries. China has advantages because of the size of its economy and trade. India does not want to be left behind and so is trying to link its messaging system with other countries, starting with the UAE. Efforts are afoot to promote the use of INR in transactions with Indonesia, Sri Lanka and some other countries. Given the unstated aim to not lag China, the MoU with UAE is a positive step. The results of such arrangements will show up over a period of time.

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