Other BriefingsIndia Pushes for Rupee-Dirham Trade Settlement to Reduce Dollar Dependence
In a move aimed at reducing reliance on the U.S. dollar, Reuters is reporting that the Reserve Bank of India (RBI) has encouraged banks involved in transactions with the United Arab Emirates (UAE) to settle a portion of their trade payments directly in Indian rupees (INR) and Emirati dirhams (AED).
According to five banking sources, while no specific targets have been set, banks are expected to report the extent of such transactions to the RBI regularly. This directive follows the RBI’s earlier push in 2023, encouraging banks to facilitate trade settlements in local currencies after Prime Minister Narendra Modi’s visit to the UAE.
However, the latest guidance marks a stronger effort to develop a rupee-dirham trade market, reflecting India’s broader ambition to increase trade settlement in its own currency—a goal that has proven elusive for most nations.
The RBI’s strategy is part of India’s ongoing efforts to reduce its dependence on the dollar, which dominates approximately half of the world’s trade, according to the Bank of International Settlements.
Beyond its efforts with the UAE, the RBI has also renewed discussions to expand local currency trade with Russia. Notably, Indian refiners have already started paying for most of their Russian oil purchases in dirhams instead of dollars, particularly when dealing with Dubai-based traders.
To foster the development of a rupee-dirham market, the RBI has advised banks to seek a “matching flow” in dirhams from another bank when processing payments to the UAE. This approach would allow banks to directly exchange rupees for dirhams without converting to dollars first, thus avoiding the traditional dollar-dominated transaction route.
The UAE stands as India’s third-largest trading partner, with bilateral trade reaching approximately US$83 billion in the 2023-24 financial year. Of this, over US$17 billion was attributed to oil and related imports by India.
The trade balance, however, reflects a merchandise trade deficit of US$12.4 billion on India’s side. By settling trade in local currencies, India aims to mitigate dollar outflows associated with this trade deficit.
Despite the RBI’s encouragement, the transition to a rupee-dirham settlement mechanism is still in its early stages. A senior banker familiar with the matter noted that while banks and their clients appear open to the idea, it is a nascent process that will require further development.
The RBI has not mandated a complete shift to rupee-dirham payments, but the central bank’s guidance is likely to make banks more inclined to explore this alternative, gradually reducing the dominance of dollar-based transactions in India-UAE trade.
As the global economic landscape evolves, India’s push for greater use of its own currency in international trade represents a strategic move towards bolstering economic sovereignty and minimizing the risks associated with dollar dependency.
However, the success of this initiative will depend on how effectively the rupee-dirham market develops and whether other nations follow suit in adopting similar currency settlement mechanisms.
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