Local currency settlement
Also called: LCS · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Local currency settlement (LCS) means that two countries settle trade between them in their own currencies, not in a third currency such as the US dollar. It cuts the cost of converting money twice, reduces exposure to dollar swings and helps the rupee become more international. It works well only when trade in both directions is fairly balanced. Otherwise one partner piles up currency that it cannot use.
Example
Under India's 2023 LCS agreement with the UAE, the first crude oil payment in rupees and dirhams followed. The Russia case shows the limit of this approach. Rupee surpluses got stuck in Special Rupee Vostro Accounts (SRVAs) because Russia could not spend them.
Don't confuse with
- Rupee trade settlement (July 2022 framework): under this framework, trade is invoiced and settled in rupees through SRVAs, and it can apply to any partner. LCS is a bilateral deal that uses both partners' currencies.
Related concepts
- Dollarisation
- De-dollarisation
- Rupee internationalisation
- Rupee trade settlement
- Nostro and Vostro accounts