In a significant policy shift, the Reserve Bank of India (RBI) is actively promoting the use of local currencies for trade between India and the UAE. The central bank is encouraging local financial institutions to process transactions in either the Indian rupee or the UAE dirham, moving away from the U.S. dollar. This strategy is part of a broader effort to decrease global dependence on the greenback and enhance the global standing of the Indian rupee.
Initiated in January 2024, this move aligns with strategic economic objectives for both nations, who are members of the BRICS bloc. The two countries are aiming to boost bilateral trade to $100 billion under their comprehensive free trade agreement, a goal that supports the BRICS group’s drive toward de-dollarization. The RBI’s push for direct currency trade is also part of its broader agenda to facilitate trade settlements in local currencies with countries where India faces a trade deficit. By promoting these transactions, the RBI hopes to enhance the international use of the Indian rupee and reduce transaction costs.
For the fiscal year 2022-23, India reported a trade deficit of $21.62 billion with the UAE, which represented 8.2% of its total trade deficit.
Analysts suggest that facilitating rupee-dirham settlements will streamline trade, reduce currency exchange risks, and lower transaction costs for businesses. This comes at a time when bilateral trade between India and the UAE surged by 16% to $84.5 billion from April 2022 to March 2023, up from $72.9 billion in the previous fiscal year, driven by the Comprehensive Economic Partnership Agreement between the two countries.
Sajith Kumar P.K., CEO and managing director at IBMC Financial Professionals Group, highlighted the importance of this initiative. “Trading in local currencies will help enhance liquidity in the rupee-dirham market and support the growth of trade between the two nations. While the concept of direct currency settlements is not new, the RBI’s renewed focus on this mechanism indicates a strategic shift towards diversifying currency usage in international trade, particularly in the face of global economic uncertainties,” Kumar remarked.
Currency experts anticipate that banks in both India and the UAE will play a critical role in this transition, developing the necessary infrastructure to support direct rupee-dirham trade.
This initiative is expected to encourage more businesses to adopt this settlement method, potentially increasing the volume of trade conducted in local currencies.
As India aspires to strengthen its position as a global trading powerhouse and aims to become the world’s third-largest economy by 2027, the successful implementation of the rupee-dirham settlement mechanism could pave the way for similar arrangements with other major trading partners. This effort is part of a broader global trend where countries are seeking alternatives to dollar-dominated trade, driven by geopolitical shifts and a desire to minimize exposure to currency fluctuations.
Kumar further noted that adopting direct local currency transactions could protect bilateral trade from geopolitical risks and currency volatility. “It will have a significant impact as the removal of hedging costs should make India’s export pricing more competitive,” he said. This approach reflects a strategic move towards enhancing trade stability and reducing reliance on traditional reserve currencies amidst a changing global economic landscape.
