Raghuram Rajan and Mubarak Rashed Al Mansoori sign a deal to consider a currency swap agreement.
Dubai - Businesses in both nations can reduce risk of interest rate fluctuations
The Central Bank of the UAE has signed a memorandum of understanding (MoU) with the Reserve Bank of India in Mumbai to consider a currency swap agreement that is expected to give a major thrust to bilateral economic and trade ties.
Mubarak Rashed Al Mansoori, Governor of the Central Bank of the UAE, signed the MoU on behalf of Central Bank of the UAE and Governor Raghuram Rajan signed the MoU on behalf of the RBI.
This MoU signals a new stage of cooperation, which would strengthen economic ties between India and the UAE.
The MoU was signed on the sidelines of the recent visit of His Highness Shaikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, to India.
In December 2015, the central banks of the UAE and China inked a similar deal "for the purpose of purchasing, selling, repurchasing and reselling of the dirham against Chinese yuan and vice versa. The proposed currency swap agreement between the UAE and India will further strengthen the close economic relationship and cooperation between the two countries," the RBI said.
India is the UAE's top trading partner while the Emirates is India's third largest trading partner after the US and China. The UAE-India trade relations go back centuries.Trade exchange between the nations topped over Dh216 billion in 2014-15. The figure includes around Dh122 billion worth of Indian exports to the UAE and Dh94 billion worth of UAE exports to India, mainly oil and petroleum products.
This has made the UAE the largest market for Indian products in the Middle East while the subcontinent maintained its position as one of the UAE's top trading partners, said Pradeep Unni, senior relationship manager, Richcomm Global Services DMCC.
"A currency swap agreement under such conditions will boost the economic status of both nations. This will not create any undue pressure on both countries to convert the currency to pay each other," Unni pointed out.
"A currency swap agreement will give more stability to Indian foreign trade and financial deals with the UAE and also support short term liquidity mismatches of Indian financial markets," said Sajith Kumar PK, CEO and managing director of IBMC Financial Professionals Group.
"Both the UAE and India have currency swap agreements with major exporting countries, including China, Japan and South Korea. India is always focusing to stabilise its balance of payments positions by entering into currency swap agreements with many of its export countries, especially with oil-supplying countries. This will also support to strengthen the Indian rupee and reduce the risk, charges and possible losses in deals involving rupee and dirham," said Kumar.
"Firms in India which buy oil from companies in the UAE will have to convert rupee to dirham to make the payment. Similarly, firms importing textiles and gold ornaments will have to convert their dirhams to rupee to pay their counterparty. This involves risk of change in value of currency in two stages," said Unni.
"Under these conditions, these firms can exchange their currencies at a fixed exchange rate. This is currency swap agreement. This agreement can also be done by two countries for a predetermined amount and passed on to businesses. Business in both nations will thrive despite huge currency volatility," explained Unni.
He said a currency swap agreement between nations can increase the competitive advantages of corporate expansion in both countries. Since both the UAE and India have different interest rates, any currency fluctuations can either encourage or discourage inflation which impacts the exchange rates between two currencies. Both the nations can mitigate the risk of unwanted interest rate fluctuations through the currency swaps, said Unni.
"Given the strong bilateral business ties, many UAE firms are keen to expand to India and so will companies looking to venture out to the UAE. However, corporate firms may find it more expensive to borrow in Indian currency than in the UAE or vice versa. In either circumstance, the company has a competitive advantage in taking out loans from its home country as its cost of capital is lower.
"If a company in India wants to expand into the UAE while a company from the Emirates wants to step up operations in India, they could agree to a currency swap which, by virtue of trading payments on the debt in the other currency, allows each to achieve their loans at a lower cost than they could have otherwise achieved," Unni explained.
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