On Saturday, the Central Bank of UAE (CBUAE) and Reserve Bank of India (RBI) signed off two agreements in Abu Dhabi. These agreements aim to create a structure for conducting cross-border transactions using local currencies and connecting payment and messaging systems.
The exchange of agreements occurred in the presence of Indian Prime Minister Narendra Modi and UAE President Sheikh Mohamed Bin Zayed Al Nahyan, as stated by the Reserve Bank. The first memorandum of agreement focuses on promoting the use of the Indian rupee (INR) and the UAE dirham (AED) for cross-border transactions, while the second agreement involves cooperation in interlinking their payment and messaging systems.
Since its launch approximately seven years ago, the Unified Payments Interface (UPI) in India has garnered an impressive user base of 260 million individuals in a population of 1.4 billion. UPI has played a significant role in India’s transition towards cashless payments due to its user-friendly nature and interoperability.
According to Mastercard’s 2022 New Payments Index, Indian consumers have demonstrated the highest willingness among any in the Asia-Pacific region to embrace emerging cashless payment methods. The study revealed that 93% of Indians are likely to have made a cashless payment within the past year, indicating a strong adoption and acceptance of digital payment options in the country.
Prime Minister Narendra Modi revealed that India and France have reached a mutual understanding to implement India’s unified payments interface (UPI). During his speech to the Indian community, Modi shared that this initiative will commence at the Eiffel Tower, enabling Indian visitors to make payments in Indian rupees.
India has been promoting cross-border transactions in local currencies as part of its efforts to reduce dependence on the US currency aiming to enhance economic cooperation and facilitate seamless transactions between countries.
The Reserve Bank of India (RBI) has signed two Memorandums of Understanding (MoUs) with the United Arab Emirates (UAE) to establish a framework for the use of local currencies, namely the Indian Rupee (INR) and the UAE Dirham (AED), in bilateral transactions. The MoU aims to create a Local Currency Settlement System (LCSS) that enables exporters and importers to invoice and pay in their respective domestic currencies.
The use of local currencies, INR and AED, for transactions between India and the UAE has several benefits. It optimizes transaction costs and settlement time, making it more convenient for businesses and individuals involved in cross-border trade and remittances. Further, it aids to provide an INR-AED foreign exchange market, increases investments, and facilitates remittances between the two countries.
By reducing reliance on the US dollar, India aims to strengthen economic ties with its trading partners and enhance financial stability. It also aligns with the broader global trend of countries seeking to diversify their currency exposure and reduce the dominance of the US dollar in international transactions.
According to the RBI, the two central banks have agreed to collaborate on connecting their Fast Payment Systems (FPSs) as part of the ‘Payments and Messaging Systems initiative. This includes linking the UPI to the UAE’s Instant Payment Platform (IPP). The respective Card Switches, namely the RuPay switch in India and UAE SWITCH in the UAE, will also be linked. There are also plans to explore the integration of payment messaging systems, specifically India’s Structured Financial Messaging System (SFMS) with the messaging system in the UAE.
Users in any nation will reportedly be able to complete cross-border fund transfers quickly, easily, safely, and affordably thanks to the UPI-IPP linkage.