LCS System for Settlement of Crude Oil Transactions Between India and UAE

August 15, 2023

India and the United Arab Emirates (UAE) have initiated a groundbreaking move by opting to settle their crude oil transactions using their respective national currencies. The landmark transaction will involve the utilization of the Indian rupee and the UAE dirham, representing a notable transformation in the dynamics of international trade. This transformative change is facilitated by the Local Currency Settlement (LCS) System, which was introduced via an MoU signed during the visit of Prime Minister Narendra Modi to the UAE. The LCS System effectively removes the necessity for intermediary currencies, leading to a reduction in both transaction time and associated costs. This pioneering step is expected to enhance economic cooperation, bolster economic resilience, and strengthen bilateral relations. The system’s success has already been demonstrated with transactions involving gold trade. As India seeks to promote its national currency in international transactions, this move sets a precedent for innovative trade practices.

How have India and the UAE shifted their crude oil transactions?

India and the UAE have embarked on a significant shift by settling their crude oil transactions using their own national currencies, the Indian rupee and the UAE dirham. This move aims to enhance economic cooperation and reduce transaction costs by eliminating the need for intermediary currencies.

What is the Local Currency Settlement (LCS) System, and how does it work?

The LCS System, introduced through a Memorandum of Understanding (MoU), enables cross-border transactions between India and the UAE using the rupee and dirham. It eliminates the reliance on intermediary currencies, streamlining the process and reducing transaction time and costs.

What benefits does the LCS system offer to India and the UAE?

The LCS system brings multiple benefits, including reduced transaction time and costs, strengthened bilateral relations, and enhanced economic resilience. It allows both countries to save on foreign exchange expenses, promoting economic cooperation and investment in local assets.

What other commodities have been traded using the LCS system?

Apart from crude oil, the LCS system has been successfully demonstrated in transactions involving gold trade. A sale of 25 kilograms of gold from a UAE exporter to India was invoiced using the LCS system, proving its viability.

How does this move align with India’s efforts to promote its national currency in international transactions?

India has been working on expanding the usage of its national currency in global trade. Engaging in cooperation with banks across different nations, India has established dedicated rupee vostro accounts within domestic banks. This initiative aims to streamline the trading of national currencies.

How does this move impact India’s global trade standing?

By adopting the LCS system with the UAE, India sets a precedent for innovative trade practices that can reshape international commerce. This move enhances India’s position in the global trade arena and demonstrates its commitment to promoting its national currency.

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