Economic Implications of India-UAE Forex Integration

India and the United Arab Emirates (UAE) recently made history when they agreed on several landmark trade and economic cooperation agreements during Indian Prime Minister Narendra Modi’s historic trip to Abu Dhabi on July 15, 2023, signaling a new chapter for economic ties between their nations.

 

At the center of these agreements is a framework allowing businesses from both countries to use local currencies for trade settlement. Businesses in both nations now invoice and pay for goods and services using domestic currency invoices like the Indian Rupee (INR) or UAE Dirhams (AEDs), marking an important step toward de-dollarization that alters regional financial dynamics. This forex integration marks an exciting change that marks an evolution in regional finance dynamics.

Economic implications

The implications of forex integration are far-reaching and multidimensional. It is convenient for businesses and represents an economic move with potential advantages for both economies involved.

Dependency on money

De-dollarization takes great strides forward when nations adopt local currencies in place of dollars for trading purposes, thus lessening dependency and possibly protecting both nations from fluctuations in their value. Furthermore, this decision empowers both nations with more control over their respective economic policies.

Enhance trade and economic cooperation

Forex integration between India and the UAE should aid trade by cutting transaction costs, eliminating exchange rate risks, streamlining operations, making transactions simpler and more efficient, and likely increasing trade and investment between these two nations.

Strengthen remittance flows

UAE employment provides overseas Indians with a vital source of remittances sent back home, accounting for 18% in 2020–21 and second only to the US in terms of total volume sent. Being able to send local currency remittances could make transactions faster and cheaper, potentially increasing volume through these channels.

Trade boom

Bilateral trade between India and the UAE reached new heights during the financial year 2022–23. Trade has surged from $72.9 billion (April 2021–March 2022) to $84.5 billion (April 2022–March 2023), representing a 16% annualized increase. This rise demonstrates how effective forex integration and Comprehensive Economic Partnership Agreement (CEPA) agreements between both nations are.
Landscape

UAE investments in India are estimated at USD 17–18 billion, of which more than USD 11 billion come in the form of Foreign Direct Investment (FDI). Most Indian FDI has gone towards coal, oil and gas production, and real estate; UAE investors tend to focus more heavily on real estate, ceramics, and glass sectors compared with their Indian counterparts. With forex integration likely making investing easier across industries, that would further promote economic collaboration between both nations.

Bilateral trade in its future form

India and the UAE already enjoy nearly $60 billion in bilateral trade annually, and their forex integration agreement and CEPA should see this figure reach $100 billion within five years due to increased trade facilitation from forex integration and CEPA. This ambitious target demonstrates its potential to help promote trade and investment between both nations.

Local currency settlement system

The Memorandum of Understanding (MoU) to establish a framework for using local currencies in transactions seeks to put into effect a Local Currency Settlement System, which would promote the bilateral use of INR and AED, making transactions more efficient and cost-effective.

Future of forex integration

Currency agreements between the UAE and India aim to foster an efficient and cost-effective trade environment, including direct trade transactions that should streamline trade processes while decreasing conversion fees and transfer fees.

LCSS stands for local currency settlement system.

India and the UAE’s framework for using local currencies in transactions seeks to implement a Local Currency Settlement System (LCSS), enabling exporters and importers alike to invoice and pay invoices using domestic currencies such as rupees or dirhams, in turn leading to the establishment of the INR-AED forex market and further solidifying forex integration.

Integration between the unified payments interface (UPI) and the instant payment platform (IPP)

India and the UAE have reached an agreement to link their Unified Payments Interfaces, respectively (UPI and IPP) to each other for instant cross-border payments that make transactions even faster and more efficient, underscoring both nations’ commitment to deepening economic cooperation between themselves. This development marks an impressive development that speaks volumes of both nations’ intent to advance economic cooperation among themselves.

Strategic transformation initiative

India, under Prime Minister Narendra Modi’s leadership, has undergone a transformation in its foreign policy. From strict non-alignment to strategic partnerships, with the UAE being one of the key partners. Forex integration stands as evidence of this change and strengthens relations between India and the UAE.

Global economic development: the driving force of global economic development

India and the UAE’s partnership is not only mutually advantageous; it is driving global economic development as a whole. In just 11 months since implementing CEPA (May 1, 2022–March 31, 2023), bilateral non-oil trade has reached $45.5 billion, expected to surpass $50 billion this year and hit $100 billion by 2030! Such remarkable progress reflects well on CEPA, as over one year has passed since it entered force.

 

Impact on the Indian economy

India has shown remarkable resilience amid global uncertainties. According to World Bank projections for FY23/24 GDP growth forecasted for December 2022–23, growth should be limited by slower consumption growth and challenging external conditions; however, forex integration with the UAE might provide an added boost through trade facilitation and investment facilitation.
UAE’s global economic integration efforts

The UAE has long supported global efforts to advance economic integration. One such effort involves forex integration between the UAE and India; non-oil trade growth highlights its positive progress one year post-implementation of CEPA, making sure we reach $100 billion in non-oil trade annually by reaching our annual goal.

India-UAE forex integration is an ambitious venture with immense potential to transform both nations’ economic landscapes as well as contribute to global economic development. By creating more cost-effective trade environments and encouraging bilateral trade to flourish more freely between them, this initiative should boost bilateral trade volumes, enhance cooperation between economic sectors, and strengthen economic ties between them in future years. Indeed, its significance extends far beyond India and UAE bilateral relations alone to become a harbinger for future global integration and cooperation efforts.