The Reserve Bank of India (RBI) and the Maldives Monetary Authority signed a Memorandum of Understanding (MoU) to promote the use of local currencies for cross-border transactions.

Key purpose of the MoU

• To establish a framework encouraging the use of the Indian Rupee (INR) and Maldivian Rufiyaa (MVR) in:
  • Current account transactions.
  • Permissible capital account transactions.
  • Other mutually agreed economic and financial activities.

About Local Currency Settlement System (LCSS)

• LCSS is a bilateral arrangement between two countries that allows them to settle trade transactions directly in their own currencies, reducing reliance on a third currency like the US dollar.
• This system aims to reduce transaction costs, minimize foreign exchange risks, and promote bilateral trade.
• India has implemented LCSS with several countries, including:
  • United Arab Emirates (UAE): India and the UAE have established an LCSS to facilitate trade in their respective currencies, reducing dependence on the US dollar.
  • Other Potential Partners: India is exploring LCSS arrangements with other countries, particularly those in the Middle East, Africa, and Southeast Asia, to further diversify its trade and reduce currency risks.

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Benefits of using local currency

• Facilitate Trade: Exporters and importers can invoice and settle in their respective domestic currencies.
• Development of Currency Pair Market: Promotes trading in the INR-MVR currency pair in the foreign exchange market.
• Cost and Time Efficiency: Optimises transaction costs and reduces settlement time.
• Strengthens economic ties between India and the Maldives while enhancing ease of doing business for bilateral trade.

India-Maldives Economic Relations

• Strong Economic Ties: India and Maldives share strong economic ties, underpinned by geographical proximity, historical links, and cultural affinities.
• Significant Trade: Bilateral trade between the two countries has been steadily increasing. 
  • India Exports to Maldives was US$586.97 Million during 2023, according to the United Nations COMTRADE database on international trade.
• Indian Investments: India is a major investor in the Maldives, with significant investments in infrastructure, tourism, and other sectors.