The Local Currency Settlement System (LCSS) is a bilateral mechanism, or concept, that allows cross-border transactions between two countries to be settled in their respective domestic currencies, rather than a third-party currency like the US Dollar. The system was created to reduce dependence on the US Dollar, mitigate currency risk from exchange rate volatility, and optimize transaction costs and settlement time. The Reserve Bank of India (RBI) laid the formal groundwork for this framework in July 2022 by issuing a circular that permitted Indian banks to open Special Rupee Vostro Accounts (SRVAs) for correspondent banks of partner countries.
The mechanism works by enabling exporters and importers to invoice and pay in their own currencies. For example, an Indian importer pays in Indian Rupees (INR) into the SRVA of the foreign exporter's bank, and the foreign exporter is paid from the balance in that account in their local currency. The LCSS covers all current account transactions and permitted capital account transactions. A key recent development is the Memorandum of Understanding (MoU) signed between India and the United Arab Emirates (UAE) in July 2023 to establish an LCSS to promote the use of the INR and the UAE Dirham (AED). This arrangement connects to the broader RBI framework for Rupee-based trade and the goal of internationalizing the Rupee. In August 2023, the first crude oil transaction was successfully executed under the India-UAE LCSS. Furthermore, in August 2025, the RBI eased the process for opening SRVAs by allowing Category-I Authorised Dealer banks to open them without prior RBI approval, replacing the earlier requirement for case-by-case approval.