Forging a New Financial Destiny: The India-UAE Local Currency Settlement System Reshaping Global Trade

Introduction: The Watershed Moment in Cross-Border Finance

On an ordinary business day in July 2023, a transaction occurred that would have been unimaginable just years before. A diamond exporter in Mumbai received payment directly in Indian rupees from a Dubai-based luxury retailer. Simultaneously, an Indian construction worker in Abu Dhabi sent money home to his family in Kerala, with the dirhams converting to rupees instantly at minimal cost. Meanwhile, a UAE-based investment firm purchased shares in an Indian tech startup using dirhams that were settled in rupees without ever touching the U.S. financial system. These simultaneous transactions represented something extraordinary: the quiet activation of a financial bridge that promises to reshape one of the world’s most important economic corridors.

The establishment of the Local Currency Settlement System (LCSS) between India and the United Arab Emirates marks a watershed moment in international finance. This isn’t merely a technical adjustment to banking protocols; it’s a profound reimagining of economic sovereignty between two nations that collectively represent the future of global growth. With this system, India and the UAE are challenging the fundamental architecture of international trade that has prevailed since the Bretton Woods agreement established dollar hegemony nearly eighty years ago. They are building what amounts to a financial express lane between their economies—bypassing the congested dollar-dominated highways that have dictated global commerce for generations.

This revolutionary framework represents the culmination of centuries of historical ties, decades of economic partnership, and years of strategic planning. It’s a story that intertwines ancient dhow trading routes with cutting-edge digital payment systems, geopolitical calculation with grassroots economic benefit, and national ambition with regional leadership. As we examine this transformation, we uncover not just a bilateral agreement but a template for the future of Global South economic relations in an increasingly multipolar world.

1. Historical Foundations: The Deep Roots of a Modern Partnership

The economic relationship between India and the UAE stretches back over millennia, predating the formation of both modern nations. Archaeological evidence reveals that as early as 3000 BCE, maritime trade routes connected the Indus Valley Civilization with settlements in what is now the Emirates. These ancient commercial pathways established patterns of exchange that would persist through centuries of empire, colonialism, and eventual independence.

The Dhow Commerce Era: For centuries, wooden dhows sailed the seasonal monsoon winds between Indian ports in Gujarat, Kerala, and Konkan and the trading centers of the Persian Gulf. These vessels carried Indian textiles, spices, timber, and foodstuffs to the Gulf, returning with pearls, dates, horses, and gold. This exchange created enduring commercial networks and cultural connections that would form the bedrock of the modern relationship. Many prominent merchant families in both regions can trace their business lineages back to these dhow trading days.

The Migration Wave: The discovery of oil in the UAE in the 1950s and the federation’s formation in 1971 created a new chapter in this relationship. As the Emirates embarked on their remarkable transformation from pearl diving economy to global hub, they turned to India for both skilled professionals and manual labor. Engineers, accountants, doctors, and managers arrived alongside construction workers, drivers, and service staff. This migration created a profound human bridge between the nations—today, approximately 3.5 million Indians call the UAE home, representing over 30% of the country’s population and forming its largest expatriate community.

The Dollar Dependency: As trade and remittance flows grew exponentially in the late 20th century, they became channeled almost exclusively through the U.S. dollar. An Indian company importing UAE oil paid in dollars. A Dubai-based conglomerate purchasing Indian steel paid in dollars. An Indian nurse in Sharjah sending money home to Kerala saw her dirham salary converted to dollars before becoming rupees. This system created what economists call the “exorbitant privilege” for the dollar—while generating significant transaction costs, exchange rate risks, and geopolitical vulnerabilities for both India and the UAE.

The CEPA Breakthrough: The relationship entered its modern phase with the signing of the Comprehensive Economic Partnership Agreement (CEPA) in February 2022. This wasn’t a typical tariff-reduction deal but a comprehensive framework covering goods, services, investment, digital trade, and intellectual property. The results were immediate and dramatic: bilateral trade surged from $20.8 billion in fiscal year 2022 to $28.1 billion in FY2024—a remarkable 35% increase. Non-oil trade alone reached $37.6 billion by the first half of 2025, representing a 33.9% increase year-over-year. This explosive growth created both the imperative and the ideal conditions for a more efficient financial infrastructure, setting the stage for the local currency settlement system.

2. Architectural Blueprint: Deconstructing the Settlement Mechanism

The India-UAE local currency settlement system represents a masterpiece of financial engineering—a sophisticated multi-layered framework built to seamlessly facilitate cross-border transactions while minimizing friction, cost, and risk. The system rests on three complementary pillars that together create a comprehensive alternative to dollar-based settlement.

Pillar 1: The Account Infrastructure – Special Rupee Vostro Accounts (SRVAs)
At the heart of the system lies the Special Rupee Vostro Account mechanism. A Vostro account (from the Latin “your”) is essentially an account that a foreign bank holds with a domestic bank in the domestic bank’s currency. The “special” designation refers to accounts specifically designated for trade and investment transactions under the LCSS framework.

The operational flow works as follows:

• For an Indian importer: When purchasing goods from the UAE, they pay rupees directly into the SRVA maintained by the UAE exporter’s bank with its Indian partner bank.
• For an Indian exporter: They receive payment in rupees directly from the SRVA of the UAE importer’s bank.
• The UAE side: A mirror process occurs using dirham-denominated accounts in UAE banks.

A critical breakthrough came in August 2025 when the Reserve Bank of India (RBI) streamlined the process, allowing Indian banks classified as Authorised Dealer Category-I to open these SRVAs for their foreign correspondent banks without needing prior approval. This administrative simplification dramatically accelerated adoption across the banking sector.

Pillar 2: The Digital Payment Interlinkage – UPI, IPP, and Card Networks
The second pillar represents the truly revolutionary consumer-facing aspect of the system—the seamless integration of both countries’ real-time payment infrastructures:

• UPI-IPP Integration: The interconnection of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP) enables instant, low-cost cross-border funds transfers. This allows an Indian tourist in Dubai to pay a merchant via UPI while the merchant receives dirhams, and vice versa for UAE visitors to India.
• Card Switch Interoperability: The linking of India’s RuPay switch with the UAE’s UAESWITCH enables mutual acceptance of domestic cards. A RuPay card can be used at point-of-sale terminals in the UAE, while UAE-issued cards work seamlessly in India.

Pillar 3: The Financial Messaging Alternative – SFMS Linkage
While not replacing SWIFT entirely, the system promotes the use of direct secure channels between the Indian and UAE financial systems. By linking India’s Structured Financial Messaging System (SFMS) with its UAE counterpart, the nations have created a resilient alternative for transmitting transaction information, enhancing both security and sovereignty.

Table: The Three Pillars of the India-UAE Financial Architecture

Pillar	Key Components	Primary Function	Status & Adoption
Account Infrastructure	Special Rupee Vostro Accounts (SRVAs), Dirham Accounts	Facilitate trade and investment settlement in local currencies	156 SRVAs opened by 123 banks across 30 countries (Feb 2025); Rs. 134.55B in balances (Dec 2024)
Digital Payments Linkage	UPI-IPP Interconnection, RuPay-UAESWITCH Integration	Enable instant, low-cost cross-border payments and card transactions	Fully operational; rapid adoption by consumers and merchants
Financial Messaging	SFMS (India) & equivalent UAE system linkage	Secure channel for transaction information	Operational as alternative to SWIFT for bilateral transactions

3. Geopolitical Context: The Strategic Imperatives Behind the Shift

The move to establish a local currency settlement system did not occur in a vacuum. It was the product of converging geopolitical, economic, and strategic factors that made the status quo increasingly untenable and the alternative increasingly attractive.

The Sanctions Wake-Up Call: The Russia-Ukraine conflict that began in 2022 and the subsequent wave of financial sanctions served as a stark geopolitical wake-up call for many nations. The weaponization of dollar dominance—including restrictions on access to SWIFT and freezing of foreign currency reserves—demonstrated the vulnerability inherent in excessive reliance on a single currency system. For strategically autonomous nations like India and the UAE, this highlighted an urgent need to build resilient alternative payment channels insulated from great power competition.

The Multipolar World Order: Both India and the UAE see themselves as emerging powers in an increasingly multipolar global order. This settlement system represents a practical step toward greater financial sovereignty and strategic autonomy. By reducing their vulnerability to external financial pressure, both nations enhance their policy space and negotiating leverage in international affairs. The system signals their intention to be rule-makers rather than rule-takers in the evolving global financial architecture.

Economic Pragmatism: Beyond geopolitics, straightforward economic calculation drove the decision. The constant fluctuation of the U.S. dollar created significant uncertainty for businesses. An Indian exporter might agree on a price in dollar terms only to find their profit margin wiped out by the time payment was received due to an unfavorable exchange rate shift. The new system allows businesses to negotiate directly in local currencies, dramatically reducing this foreign exchange risk and enabling more accurate long-term planning.

The Remittance Economy: The immense flow of remittances from the UAE’s large Indian diaspora provided another powerful motivator. With approximately 3.5 million Indians in the UAE, remittances represent a vital financial flow. India received $111 billion in remittances in 2022, with about 28% originating from GCC countries including the UAE. High transaction costs and delays in traditional channels burdened these workers and their families. The new system promises to make these transfers faster, cheaper, and more reliable.

Regional Leadership Aspirations: Both nations see themselves as regional leaders—India in South Asia and the Indian Ocean region, the UAE as a Gulf powerhouse and global hub. This partnership establishes them as pioneers in South-South financial innovation, creating a model that other nations might emulate. Their collaboration positions them at the forefront of a broader movement toward financial diversification in the Global South.

4. Transformative Impact: Sector-by-Sector Revolution

The implementation of the local currency settlement system is producing transformative effects across multiple sectors, creating winners throughout both economies and demonstrating the tangible benefits of financial innovation.

Gems and Jewelry: This sector has emerged as an early champion of the new system. India’s gems and jewelry exports to the UAE surged from approximately $4.9 billion to $8 billion since CEPA implementation. The ability to transact directly in local currencies has eliminated significant transaction costs for an industry where profit margins are often slim and price volatility can be devastating. Small family-owned operations in Jaipur and Surat can now price their products in rupees for UAE buyers, securing better margins and more stable long-term partnerships.

Pharmaceuticals and Healthcare: India’s pharmaceutical industry, a global leader in generic medicines, has benefited enormously from the streamlined processes. Under CEPA, Indian drug manufacturers receive preferential treatment and faster regulatory approval in UAE markets. The local currency settlement has further accelerated this trade by simplifying financial transactions. Indian pharma companies can now directly invoice UAE distributors in rupees, reducing operational complexity while expanding market share in a critical region.

Textiles and Apparel: The immediate elimination of tariffs on 80% of textile products under CEPA created massive opportunities for Indian manufacturers. The local currency settlement mechanism has amplified these benefits by reducing transaction costs and eliminating exchange rate risk. Exporters from textile hubs like Tiruppur and Ludhiana can now sell to UAE retailers and receive payment in rupees almost instantly, bypassing the need for foreign exchange intermediaries. This has been particularly transformative for small and medium enterprises that previously found international trade prohibitively complex.

Remittances and Financial Services: The impact on remittances represents perhaps the most human dimension of this financial transformation. When the Indian rupee reached record lows against the dirham in August 2025 (trading between ₹23.63 and ₹23.95 per AED), the local settlement mechanism provided powerful advantages. Indian workers could send money home and get significantly more rupees for their dirhams. Exchange houses like Al Ansari and UAE Exchange reported surging transaction volumes during this period. The UPI-IPP linkage has further revolutionized this space by enabling near-instant transfers at minimal cost through mobile apps.

Tourism and Education: The interconnection of payment systems has created a seamless experience for tourists and students. Indian visitors to the UAE can use UPI apps to pay for purchases directly, while UAE nationals in India can use their local payment apps. For education, Indian universities can now receive tuition payments from UAE students in rupees, simplifying a process that previously involved multiple currency conversions and delays.

Table: Economic Impact Across Key Sectors

Sector	Pre-LCSS Challenges	Post-LCSS Benefits	Quantitative Impact
Gems & Jewelry	High transaction costs on high-value goods; vulnerability to dollar volatility	Price stability; reduced costs; stronger buyer-seller relationships	Exports increased from $4.9B to $8B since CEPA
Remittances	High fees (5-7% average); slow processing; informal hawala channels	Near-zero fees; instant transfers; full formalization	Transaction volumes increased 40% during rupee depreciation
MSMEs	International trade complexity prohibitive for small businesses	Democratized market access; manageable transaction costs	27% increase in small business exports to UAE
Tourism	Card transaction declines; currency exchange hassles and costs	Seamless payments; enhanced visitor experience	18% increase in bilateral tourist flows

5. Digital Infrastructure: The Technological Backbone

The local currency settlement system would remain merely theoretical without the cutting-edge digital infrastructure that makes it operational. This technological foundation represents one of the most sophisticated examples of financial technology integration between nations.

India’s Digital Public Infrastructure (DPI) Triumph: India has emerged as a global leader in building scalable, public-purpose digital platforms. The Unified Payments Interface (UPI) is the crown jewel of this system—a real-time payment platform that allows users to link multiple bank accounts to a single mobile application. UPI’s success has been extraordinary, processing over 11 billion transactions monthly. Its architecture is uniquely suited for cross-border integration, with robust security, scalability, and flexibility.

The UAE’s Fintech Ambition: The UAE, particularly Dubai and Abu Dhabi, has aggressively positioned itself as a future-focused fintech hub. Its Instant Payment Platform (IPP), launched by the Central Bank of the UAE, was designed from inception with interoperability in mind. The UAE’s leadership recognized that integrating with major partners like India would enhance its position as a global financial center. The willingness to seamlessly connect IPP with UPI demonstrates a commitment to practical collaboration over proprietary systems.

Interoperability Achievement: The technical integration of UPI and IPP represents a masterpiece of financial technology engineering. It required solving complex challenges related to currency conversion, settlement finality, regulatory compliance, and user experience. The result is a system that allows a user in one country to pay someone in the other with a experience nearly identical to domestic transactions.

Card System Integration: The linking of India’s RuPay switch with the UAE’s UAESWITCH required similar technical sophistication. It enables mutual acceptance of domestic cards while handling currency conversion at the network level rather than through individual banks. This creates a seamless experience for cardholders while ensuring optimal exchange rates.

Financial Inclusion Impact: Perhaps most significantly, this technological integration advances financial inclusion objectives for both nations. The International Monetary Fund has noted that “because formal remittances involve high fixed costs and hence are expensive to provide, low-income individuals refrain from remitting, or are incentivised to use cheaper informal alternatives.” By dramatically reducing these costs, the formal financial system becomes more accessible to those who need it most. Low-wage migrant workers particularly benefit from the affordable, instant transfer capabilities.

Future-Proofing: The architecture is designed with future expansion in mind. The system can potentially incorporate additional currencies, link with other regional payment systems, and integrate emerging technologies like central bank digital currencies (CBDCs). Both India and the UAE are developing their own digital currencies (the Digital Rupee and Digital Dirham), which could eventually be integrated into this framework.

6. Implementation Journey: From Concept to Reality

The implementation of the rupee-dirham settlement system has progressed with remarkable speed and efficiency, reflecting the high-level political commitment and technical competence of both nations.

The Phased Approach: Implementation followed a carefully calibrated phased approach:

• Phase 1 (Conceptualization): Initial discussions and feasibility studies occurred alongside CEPA negotiations in 2021-2022.
• Phase 2 (Framework Establishment): The formal memoranda of understanding were signed in July 2023, establishing the legal and regulatory foundation.
• Phase 3 (Banking Integration): Banks began establishing SRVAs and adapting their systems throughout 2024.
• Phase 4 (Digital Integration): The UPI-IPP linkage and card network integration were activated in early 2025.
• Phase 5 (Expansion and Optimization): The system is now entering a phase of broadening adoption and functional expansion.

Adoption Metrics: The uptake has exceeded expectations across multiple dimensions:

• Banking Participation: By February 2025, 156 Special Rupee Vostro Accounts had been opened by 123 correspondent banks across 30 countries, with 26 Indian banks participating in the system.
• Transaction Volumes: Total vostro balances reached Rs. 134.55 billion (approximately $1.6 billion) as of December 2024, demonstrating substantial utilization.
• User Adoption: Cross-border transactions through the UPI-IPP linkage have grown at approximately 15% month-over-month since launch.

Sectoral Rollout: Different sectors have adopted the system at varying paces based on their specific characteristics:

• Fast Adoption: Gems and jewelry, pharmaceuticals, and textiles were early adopters due to their existing high trade volumes and sensitivity to transaction costs.
• Moderate Adoption: Manufacturing and automotive sectors have adopted more gradually as they work through complex supply chain relationships.
• Emerging Adoption: Services trade, including digital services, education, and healthcare, represents the next frontier for expansion.

Geographic Expansion: While initially focused on direct India-UAE transactions, the system has shown potential for broader regional application. Some Indian companies are already using the mechanism for triangular trade involving partners in Africa and other Gulf states, with the UAE serving as a financial intermediary hub.

Challenges Encountered: Implementation hasn’t been without hurdles:

• Awareness Gap: Many businesses, particularly SMEs, remained unaware of the system or how to access it.
• Technical Integration: Some banks faced challenges integrating the new settlement options with their legacy systems.
• Behavioral Inertia: Treasurers at large corporations often defaulted to established dollar-based processes out of habit.
• Liquidity Management: Banks sometimes struggled with managing liquidity in less familiar currencies.

These challenges have been addressed through coordinated efforts including awareness campaigns, technical assistance, and incentives for early adoption.

7. Global Implications: A Template for the Future

The India-UAE local currency settlement system represents more than a bilateral arrangement—it offers a potential template for reshaping global financial flows in an increasingly multipolar world.

The De-Dollarization Narrative: While complete replacement of the dollar remains distant, the system contributes to the growing narrative of “de-dollarization” or more accurately, “currency diversification.” From China’s promotion of yuan usage in commodity trade to similar local currency arrangements among ASEAN nations and within BRICS, countries are increasingly exploring alternatives to dollar dominance. The India-UAE model provides a practical, successful case study that other nations can examine and potentially emulate.

A Blueprint for South-South Cooperation: The system offers a powerful model for other countries in the Global South. It demonstrates that middle powers can build efficient, sovereign financial channels without waiting for grand multilateral solutions. This is particularly relevant for regions with strong historical ties but limited dollar liquidity, such as parts of Africa, Latin America, and Southeast Asia.

Regional Integration Catalyst: The system strengthens regional economic integration across South Asia and the Middle East. As the UAE serves as a gateway to the broader Gulf region, Africa, and Europe, while India connects to South and Southeast Asia, their partnership creates a larger economic ecosystem. This could eventually incorporate other nations through similar arrangements, enhancing regional supply chain resilience and economic cooperation.

The Network Effect Challenge: The U.S. dollar’s dominance is underpinned by powerful network effects—its deep liquidity, extensive acceptance, and entrenched usage create enormous inertia. The India-UAE system doesn’t seek to replace this network but to create a complementary system tailored to their specific bilateral needs. This approach of “bilateral complementarity” rather than “systemic confrontation” may prove more sustainable and effective in the long term.

Implications for Global Financial Architecture: The system contributes to the gradual evolution toward a more multipolar international financial architecture. Rather than a single dominant currency, we may be moving toward a system with multiple international currencies serving different regions and purposes. The Indian rupee’s growing international role, facilitated by arrangements like this, positions it as a potential regional anchor currency in South Asia and the Indian Ocean region.

Lessons for Other Nations: The India-UAE experience offers valuable lessons for other countries considering similar arrangements:

• Start with strong existing trade relationships: CEPA created the necessary trade volume to make the system viable.
• Build on digital public infrastructure: Existing systems like UPI provided a ready technological foundation.
• Ensure high-level political commitment: The personal involvement of leadership in both nations was crucial.
• Take a phased approach: Gradual implementation allowed for testing and refinement.
• Address regulatory barriers proactively: Streamlining processes like SRVA approval accelerated adoption.

8. Future Trajectory: The Road Ahead

The current system represents just the foundation of what could become a much more comprehensive financial integration between India and the UAE. Several exciting development pathways lie ahead.

Expansion to Capital Accounts: The current focus is primarily on trade in goods and remittances (current account transactions). The next logical phase is expansion to facilitate investments (capital account transactions). This would allow UAE sovereign wealth funds like ADIA, Mubadala, and ADQ to invest directly in Indian assets using rupees, and Indian companies to make acquisitions in the UAE using dirhams. Such expansion would require careful calibration of capital account convertibility but would significantly deepen economic integration.

Digital Currency Integration: Both the RBI and the Central Bank of the UAE are developing their own Central Bank Digital Currencies (CBDCs)—the Digital Rupee and the Digital Dirham. A future where these two CBDCs are interoperable could revolutionize cross-border transactions further, making them even more efficient, transparent, and programmable. Smart contracts could automate trade finance and settlement processes.

Broader Regional Network: There is potential to use the UAE’s hub status to create a wider regional clearing network. For example, an Indian company could pay a Malaysian vendor in rupees, which are then converted to dirhams in the UAE and finally to Malaysian ringgit, all while avoiding the dollar. The UAE could act as a clearinghouse for a broader regional currency system spanning the Gulf, South Asia, and East Africa.

Additional Functional Expansion: Future development could include:

• Integration of trade finance platforms to create seamless credit availability for cross-border trade
• Development of rupee-dirham derivative products for better risk management
• Inclusion of additional services like insurance, brokerage, and digital services
• Expansion to include government transactions and sovereign investments

Challenges to Address: Several challenges will need to be managed:

• Liquidity Depth: Developing deeper and more liquid INR-AED markets to handle larger transactions
• Hedging Instruments: Creating more sophisticated derivative products for currency risk management
• Regulatory Alignment: Ensuring continuous harmonization of regulatory approaches as systems evolve
• Geopolitical Pressures: Navigating potential pushback from advocates of dollar hegemony

Despite these challenges, the momentum is undeniable. With bilateral trade projected to reach $100 billion in the coming years, the economic incentives to refine, expand, and promote the local currency settlement system will only grow stronger.

9. Conclusion: A New Financial Paradigm

The establishment of the India-UAE local currency settlement system represents a landmark achievement in international economic relations. It demonstrates how two nations with vision and political will can create financial infrastructure that better serves their specific needs and reflects their contemporary reality rather than historical accidents.

This partnership exemplifies the powerful convergence of economic pragmatism and strategic vision. The immediate benefits—reduced transaction costs, decreased exchange rate risk, faster settlement times—create tangible value for businesses and individuals in both countries. Meanwhile, the longer-term advantages—enhanced monetary sovereignty, deeper economic integration, greater regional leadership—strengthen the strategic position of both nations in an uncertain global landscape.

The success of this system offers valuable lessons for other countries considering similar arrangements. It demonstrates the importance of building on strong existing trade relationships, developing robust digital infrastructure, implementing phased approaches that allow for learning and adjustment, and maintaining strong regulatory coordination throughout the process.

As the global economy continues to evolve and diversify, arrangements like the India-UAE local currency settlement system are likely to become increasingly common. They represent a natural maturation of the international financial system as more economies reach sufficient scale and integration to create alternative pathways. While the U.S. dollar will likely remain dominant for the foreseeable future, it will increasingly share the stage with other currencies and settlement mechanisms.

The story of the rupee-dirham partnership is ultimately about economic empowerment and sovereignty. It’s about two historic trading partners writing the next chapter of their relationship on their own terms, with their own currencies, and their own shared vision for the future. As this partnership continues to develop, it will not only strengthen the bonds between India and the UAE but potentially inspire similar innovations across the global economic landscape. The financial bridge they are building today may well become the model for South-South cooperation tomorrow, contributing to a more diversified, resilient, and equitable global financial system.