India-UAE Currency Agreements

India-UAE Currency Agreements

News: Recently, India signed two memoranda of understanding (MoU) between the Reserve Bank of India and the Central Bank of the United Arab Emirates to increase the circulation of Rupee.

Background:
• The agreements were announced as part of PM Modi’s visit to UAE recently.
• A MoU was also announced on establishing a branch of the Indian Institute of Technology-Delhi in Abu Dhabi.

What were the agreements made?
• The first agreement between the RBI and the UAE Central Bank will establish a framework to “promote the use of local currencies (rupee and dirham) for cross border transactions.”
• The other MoU between the two central banks is aimed at interlinking their “payment and messaging systems.”
• Such cooperation will also include the mutual acceptance of domestic card schemes by interlinking national card switches.
• Integration between these systems will enhance access to payment services for the benefit of the citizens and residents of the two countries.

How currency exchange agreements will facilitate trade?
• 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 does exchange rate impacts 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