India has signed a currency swap agreement worth 3,500 crores (500 million dollars) with UAE. Now the Indian rupee can be exchanged with UAE’s Dirham. Sushma Swaraj, foreign minister of the country talked with her UAE counterpart Abdullah bin Zayed on a wide range of issues including cooperation in areas like energy, defense, and counter-terrorism. The currency swap will allow trading between both countries without the use of the dollar, trading will take place in local currency at pre-determined rates. “The bilateral currency swap agreement between India and the UAE is expected to reduce the dependency on hard currencies like the U.S dollar,” said a statement released to media.
The currency swap is an agreement in which a country agrees to exchange its national currency for another currency. Previously India had signed a 75 billion dollar currency swap agreement with Japan in October. India’s swap currency agreement worth USD 500 million will address the rise in Current Account Deficit (CAD) and strengthen the value of Indian rupee.
There are almost 33 lakh Indians living in UAE. Indians are the largest ethnic group in UAE with more than 27 percent of the population. UAE is one of the largest trading partners of India with bilateral trade worth more than 52 billion dollars in 2017. The country is sixth largest source of Indian oil imports. The trade in local currency between both countries will eliminate the transaction costs involved in trading in dollars. The biggest problem in global trade is hegemony of dollar, the currency accounts for more than three-quarterer of the global trade. The United States uses the dominance of its currency to blackmail other countries if they refuse to follow its diktats.
Recently the US threatened to block dollar-denominated transactions on the purchase of weapons from Russia and oil imports from Iran. However, later US exempted India for oil imports and also weapon purchase from Russia.
The dominance of dollar and American use of currency to blackmail other countries has forced the countries to trade in local currency. There are other countries like China, South Korea which also have currency swap agreement with other countries. China has swap agreements with Argentina, Brazil, Hong Kong, Indonesia, Malaysia, Russia, Singapore, South Korea, United Kingdom, and many other countries. Trade in local currency is beneficial on many fronts. A country can save its foreign exchange if it trades in local currency. The repeated Balance of Payments crisis faced by developing economies could also be solved through local currency trading. The currency swap also boosts the value of the respective currency against the dollar. In last few years, India has emphasized on trading in local currency and signed currency swap agreements with many friendly countries. The trade in local currency will also help in improving the stature of the Indian Rupee in the global currency market.