The landmark agreement between the UAE and India to enable businesses to transact directly in each other's currencies - eliminating the role of the dollar - is a defining move in further boosting bilateral trade, which is on track to hit $100 billion by 2020.
The impending removal of the "middle currency" will not only help expedite smooth and swift direct trade transactions between the two nations but also will save the cost of conversion at every step.
India's Ambassador to the UAE Navdeep Suri said the agreement on direct currency transaction is in addition to other accords and memoranda of understanding, which were signed during Prime Minister Narendra Modi's recent two-day visit to Abu Dhabi and Dubai.
The agreement, which is soon to be in force, will mean large savings for business communities on both sides as trade between the UAE and India soars to new highs.
"There were two other agreements that have been finalised. One is a currency swap agreement where India and the UAE - it is an agreement between the two central banks - and the agreement has been completed and it is going to be exchanged through letters. Under this, businesses from the two sides will be able to trade directly in rupees and in dirhams and not have to go through US dollars, which means that there is a saving for business community. It makes trade between the two countries more competitive," Suri said in New Delhi while reviewing Modi's visits to the UAE, Jordan and Palestine.
Another agreement which has been finalised and will be signed soon is "between the Financial Intelligence Units which commits both countries to work more closely together in money laundering, in preventing money laundering that takes place," the Indian envoy said.
It was in February 2016 that the Reserve Bank of India and the Central Bank of the UAE signed a memorandum of understanding on bilateral swapping of the rupee with the dirham.
Promoth Manghat, CEO of UAE Exchange, said the deal is good news to business communities in both the UAE and India. This currency swap agreement is a welcome move as it enables traders on both sides to trade directly in their respective currencies, independent of the dollar or any other foreign currency.
"This historic decision means large savings on both sides as trade between the countries will grow. Lending rates can come down and funds can flow lucidly, improving liquidity immensely," said Manghat.
"The Trump administration's expansionary fiscal policy and the US Fed's consideration of a rate hike will enable the agreement to have a positive impact on the trade between the UAE and India, though the dirham is pegged to the dollar. Last but not the least it will further strengthen the long relationship between the UAE and India," said Manghat.
Pradeep Unni, head of strategic business development at Richcomm Global Services DMCC, said the significance of this historic trade agreement ebbs from that fact India ranks third among countries that export goods to the UAE, accounting for about 9.2 per cent of the total imports by the UAE.
"This trade volume is likely to hit over $100 billion by 2020, and, therefore, such a currency swap agreement will be very beneficial for all direct business transactions between the UAE and India," said Unni.
"The dirham is pegged to the US dollar, but the value of the Indian rupee is determined by a basket of currencies and this makes it is extremely difficult to confirm a trade in either currency and most traders opt to bill transactions in dollars. So, for the same trade there are three currency conversions - rupee to dollar to dirham or visa-versa," he explained.
"What this swap agreement intends to remove is the 'middle currency' and help direct business transactions between two nations saving cost of conversion at every step. Such swap agreement will also help to boost the trade confidence between the business firms as the payments are quicker, simpler and direct," said Unni.
The rationale for the currency swap agreement is evident from UAE-India trade figures. From a mere $182 million in 1982, the current level of bilateral trade amounted to about $53 billion, according to a joint statement released at the end Modi's visit.
The Confederation of Indian Industry has forecast that trade between India and the UAE is set to hit $100 billion by 2020, up from the current $60 billion. During the Indian prime minister's visit to the UAE in 2015, an announcement was made to set up a $75 billion joint fund to invest in infrastructure projects.
Relations between the two nations are being constantly expanded with four high-level visits between the two countries in the last three years. The UAE and India will undertake a number of agreements that will strengthen their historical trade relationship further. The key strategic areas of focus would be security, defence, space technology and energy.
"The UAE is the 10th-largest foreign direct investment [FDI] source market for India with cumulative FDI reaching $4.76 billion in the last 17 years from April 2000 until March 2017," said M.R. Raghu, head of research at the Kuwait Financial Centre, or Markaz.
He added that India's Department of Industrial Policy and Promotion recorded an FDI inflow of $61 million from the UAE in the April-June quarter last year.
"Last October, UAE investors announced nearly $2.5 billion worth of investments in India, including a $1 billion investment by the Abu Dhabi Investment Authority, one of the largest sovereign wealth funds in the world; $1 billion by NRI-Emirati Investor's Group, a consortium of UAE-based private investors; and a further $460 million investment by Lulu Group in Andhra Pradesh," he added.
"Both the countries target to expand their bilateral trade by 60 per cent over next five-year period. We can thus possibly expect an expansion in bilateral trade close to 12 per cent in 2018. The two leaders agreed to provide further impetus to defence relations, including through joint exercises, training of naval, air and land forces, as also in the area of coastal defence and through participation in defence exhibitions, etc."