India promotes local currency settlement with the UAE to reduce reliance on the US dollar

Recently, the Reserve Bank of India has made requests to banks with business dealings with the United Arab Emirates (UAE) to directly settle a portion of trade payments in Indian rupees and UAE dirhams. According to Reuters, this move by the Reserve Bank of India aims to avoid banks converting rupees into US dollars and then into dirhams in the international foreign exchange market. Currently, this process is in its initial stage. The central bank has not set mandatory targets but only encourages the formation of the rupee-dirham foreign exchange market and requires banks to regularly report relevant payment amounts.

The UAE is India's third-largest trading partner. In 2023, the total trade volume between the two countries exceeded 80 billion US dollars. The UAE mainly exports crude oil to India, while India exports refined chemical products and electrical appliances. After the Russia-Ukraine conflict, Russia replaced the UAE as India's main crude oil supplier, reducing the degree of trade imbalance between India and the UAE. However, there is still a great need for direct currency settlement between the two countries. For example, a large number of Indian laborers and professional technicians work in the UAE, and there is a large amount of remittances that need to be transferred back every year. Moreover, India's purchase of Russian oil through UAE oil traders also involves local currency settlement to avoid sanctions.

In July 2023, after Indian Prime Minister Modi visited the UAE, the two countries agreed to establish a local currency cross-border trade framework and a local currency settlement system that develops an alternative to the SWIFT payment system. The Reserve Bank of India allows UAE banks to open special rupee accounts in Indian banks for trade settlement and encourages importers and exporters to use rupees and dirhams for direct transactions. In that month, India conducted crude oil transactions with the UAE in rupees for the first time. However, multiple pieces of evidence show that such transactions have not been continuously carried out.

India Today believes that local currency settlement between the two countries can develop the rupee-dirham foreign exchange market and bring new opportunities to India's financial industry. It may become a precedent for bilateral local currency settlement with other countries and explore the possibility of rupee internationalization and reducing reliance on the US dollar. Some banks, encouraged by the central bank, have taken measures such as discounting service fees to promote local currency settlement, attracting some small and medium-sized traders. However, large enterprises lack motivation for conversion, and the current transaction volume is not high.

Recently, India has taken a number of measures to promote the internationalization of the rupee. In May 2024, the annual report of the Reserve Bank of India mentioned allowing banks to open rupee accounts for overseas residents abroad and provide loans. In the future, regulatory measures on non-resident rupee accounts will be further relaxed.

In addition, several Russian media and Indian media reported last week that the central banks of India and Russia have restarted negotiations to expand the local currency settlement mechanism, aiming to solve payment problems after the surge in bilateral trade. Russian experts say that negotiations are not easy due to Western sanctions and pressure. Kharlina, an associate professor at the Higher School of Economics in Russia, said that agreeing on a basic exchange rate is a convenient mechanism that helps non-US dollar currency settlement transactions between the two countries and reduces reliance on the US dollar. Serezhnev, dean of the School of International Economic Relations at the Financial University under the Russian Ministry of Finance, said that both Russia and India understand that transaction settlement needs to get rid of the control and supervision of the US Treasury Department.