By Ghulam Haider
The United Arab Emirates (UAE) and India are reportedly inching towards the final settlement of bilateral trade in the India Rupee and the Dirham, rather than the third-country US dollar or Euro, a top Indian official has been quoted as saying. The two countries have already shared the documents with one another on the proposal and the technical team is doing the required analysis.
This move would make cross-border transactions easier for both countries, as India imports and exports in large quantities and receives a significant amount of remittances from the Gulf countries.
The Reserve Bank of India (RBI) and the UAE’s Central Bank officials have been working together since last year to introduce a Rupee-Dirham payment mechanism. India had also prepared a concept paper on Rupee-Dirham trade and shared it with the UAE authorities. Moreover, India and the UAE signed a free trade agreement (FTA) in May last year.
The deal, which is expected to be announced by the top leaders of both countries, will make it much easier to transact in local currency. Currently, 18 other countries trade in the Indian Rupee, and the addition of the UAE would be a significant step for India’s trade and economic relations in the region. The move would also reduce the dependence on the US dollar, which has been the dominant currency for cross-border transactions.
This decision is also slated to have a positive impact on trade between India and the UAE, making it easier and more efficient for both parties to conduct transactions. Additionally, it would also set a precedent for other countries in the region to consider similar arrangements, which would further promote trade and investment in the region.
The UAE is India’s third-largest trade partner, with only the US and China having a bigger trade share. In the first half of the current financial year, bilateral trade between the two countries stood at $44 billion, while during the 2022 financial year it was recorded at $73 billion. The UAE and India have already signed a Comprehensive Economic Partnership Agreement (CEPA) which came into effect in May last year. India is a major trader for other Gulf nations also, which is why the Gulf Cooperation Council (GCC) and India are negotiating a free trade agreement.
Significant impact on both countries
The UAE and India currently use the US dollar to settle trade payments. But, if they start trading in local currencies, they would be able to save on account of foreign currency conversion fees and facilitate smoother flow of capital.
Also, the transaction costs for exporters and importers will be reduced. Once effective, trade in Rupee-Dirham will be conducted through vostro accounts of banks of the two countries.
In Davos, the Emirates had signed several partnership agreements with the World Economic Forum to enhance cooperation in strategic sectors and areas of global interest. The UAE started discussions with India and China to trade non-oil commodities in their respective currencies, rupee and yuan.
Dr Thani bin Ahmed Al Zeyoudi, UAE’s Minister for Foreign Trade, had said in Davos that discussions with India, one the largest trading partners of the Gulf country, on settling bilateral trade in rupee is in the early stage.
The move will have a significant impact on both countries’ two-way trade which is expected to hit $100 billion by 2027, following a landmark Comprehensive Economic Partnership Agreement the UAE signed with India in 2022. The pact, which went into force in May, reduces tariffs on almost 80 per cent of all goods and provides zero-duty access to 90 per cent of Indian exports.
A game-changing initiative
Since most of the currencies of the GCC countries are pegged to the dollar and a large majority of Gulf trade is conducted in US currency, countries such as India and China are increasingly seeking to pay in local currencies for various reasons, including lowering transaction costs.
Following the go-ahead given by India’s Reserve Bank to importers to open special rupee trading accounts called Vostro in 2022, Sri Lanka and Russia were the countries to use the Indian rupee trade settlement mechanism hailed by many as a game-changing initiative that allows using Indian rupees instead of dollars and other major currencies for international transactions.
India is looking to bring more countries that are short of dollars into the mechanism. As a result, several Indian banks have been allowed to open Vostro accounts to facilitate global trade settlement in rupees. India’s rupee trade settlement mechanism has also attracted interest from other countries including Tajikistan, Cuba, Luxembourg and Sudan.
India has been attempting to internationalise the rupee for a long. Nowadays, currencies like the US dollar, Euro, Japanese yen, British pound, and to a lesser extent, the Chinese yuan, can claim to be a global reserve currency. But, India has made tremendous progress towards giving the rupee this status.
As more nations try to de-dollarize international trade, the Indian rupee is getting closer to becoming a recognised currency. The opening of 60 special rupee vostro accounts in 18 countries, including Russia and Sri Lanka, has been authorised by India’s central bank, in order to facilitate the smooth operation of international trade in INR.
Saudi Arabia’s, the world’s top oil exporter and the largest Arab economy, has also expressed intention to open trade in other currencies, aside from the dollar.
Russia has been vocal in promoting local currency transactions as part of the larger “de-dollarization” movement. Yet, India has been promoting the idea of trade in local currency primarily to increase exports.
18 countries agree to trade in Indian rupee
Last week, India’s Minister of State for Finance Bhagwat Karad said RBI had granted approval to “domestic and foreign Authorised Dealer banks in 60 cases for opening SRVAs of banks from 18 nations” for settling payments in Indian rupee.
The 18 countries that have been allowed to trade in Indian rupees are Russia, Singapore, Sri Lanka, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Seychelles, Tanzania, Uganda and the United Kingdom.
India has initiated a bilateral beginning with these countries to trade in their respective currencies and over a period of time the volumes will pick up.
The US Dollar continues to lose popularity
The US Dollar continues to lose popularity in international finance and trade, with the UAE and India being the latest countries to consider dumping the dollar and conducting bilateral trade in Indian Rupees.
The reason for distrust of the dollar has been its weaponizing by the US government and in particular the cutting of Russia from the SWIFT banking network system, which is USD denominated. As at early 2022, Russia was the world’s tenth largest economy. The decision to cut Russia of from US dollar usage and freeze its USD and Euro assets has resulted in countries such as India, China, and many others seek alternatives to USD trade in case they too fall foul of US trade and political policies.
India under the Modi government this year has been assertive in its economic clout. Earlier this year India’s Central Bank allowed Rupee settlement of international trade for export promotion schemes. Now, it is negotiating with the UAE to make the base currency for bilateral trade settlements.