Local Currency Settlement System (LCSS)

Local Currency Settlement System (LCSS)

News: India and the United Arab Emirates (UAE) signed a Memorandum of Understanding (MoU) to establish Local Currency Settlement System (LCSS) for using local currencies, the Indian rupee (INR), and the UAE Dirham (AED), for cross-border transactions.

What is LCSS?
• The Local Currency Settlement System (LCSS) is a mechanism that enables cross-border transactions between two countries to be conducted in their respective domestic currencies.
• It allows exporters and importers to invoice and make payments in their local currencies, reducing the reliance on a third-party currency such as the US dollar.
• LCSS will promote the use of INR and AED for current accounts and permitted capital account transactions between the two countries.
• India-UAE trade was approximately USD 85 billion in 2022. UAE is India’s third-largest trading partner while India is UAE’s 2nd largest trading partner.

What are the advantages of recent move?
• An Indian exporter can invoice in INR, and a UAE importer can pay in AED, eliminating the need for currency conversion to a third-party currency like USD. This will reduce foreign exchange costs.
• Companies can hedge exchange rate risks by transacting in local currencies, limiting losses caused by fluctuations in exchange rates.
• It promotes bilateral trade and investment between India and UAE by facilitating easier and more efficient cross-border transactions.
• More remittances for India as the process will be faster and cheaper.

What were the other agreements made?
• An IIT-Delhi campus will be established in Abu Dhabi.
• An agreement was made to link India’s Unified Payments Interface (UPI) with UAE’s Instant Payment Platform (IPP).
• The two countries agreed to link their respective Card Switches vis-a-vis RuPay switch and UAESWITCH to enable mutual acceptance of domestic cards and processing of these card transactions.
• India’s Structured Financial Messaging System (SFMS) will be linked with messaging system in UAE to ease their financial messaging.