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Insights into the UAE-India love-in

The dirham-rupee link was the talk of Dubai even before Modi's visit

India UAE dirham rupee Wam/via Reuters
India's Prime Minister Narendra Modi and Sheikh Khaled bin Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi

At a glittering reception in Dubai last weekend, there was only one topic of conversation among the assembled movers and shakers: India and UAE currency ties.

India’s Prime Minister Narendra Modi was on his way to Abu Dhabi to visit UAE President Mohammed Bin Zayed.

And most guests at the cocktail party were certain the top priority subject on the leaders’ agenda would be a framework for the use of each country’s currency – dirham and rupee – for transactions between them.

This was viewed as a significant step, given that such transactions have usually been settled in US dollars – especially in the oil business.

A plan to align switch payments, an integrated processing system, was also to be announced during the visit, with big implications for the multi-billion dollar remittance business, but the dirham-rupee link was the headline-grabber.

I asked some attendees at the event whether they saw the dirham-rupee tie-up as a nail in the coffin of the US dollar as the world’s reserve currency.

Nobody I spoke to was seeking to bury the dollar.

Modi has sought to elevate the rupee to the status of a global currency.

And China and Russia have notably agreed to settle some trade transactions in their own currencies.

There has also been vague talk of a “Brics currency” (Brazil, Russia, India and China), which aims to also provide an alternative.

But no serious economist has suggested this could overtake the role of the dollar for many years.

The Indian cognoscenti at the reception saw the currency tie-up as a symbolic economic entente, potentially covering $85 billion of trade between India and the UAE, but also signifying the ever-closer relations between them.

It was also seen as the logical next step after the Comprehensive Economic Partnership Agreement (Cepa) signed in 2021 which sought to remove trade barriers and tariffs.

There was some scepticism, however.

India gets to pay for its oil imports – the biggest single item traded between them – in rupees, which is good for its currency and preserves its stock of hard dollar reserves.

But only time will tell if the UAE wants to build up a nest-egg of rupees, instead of the dollars which have been linked to its own currency for more than a quarter of a century.

The conversation turned to the touchy subject of the vast amounts of cheap oil India has been buying from Russia since the invasion of Ukraine last year closed most of Moscow’s traditional energy export markets.

One Indian guest at the party said India does not have to get defensive about this.

“We have a sovereign obligation to act in our own best economic interests and we also do not want to be at the mercy of oil cartels,” he said, adding that Western estimates of the amount of Urals crude flowing into India had been exaggerated.

The conversation next took a somewhat surprising turn – from the prospects for the UAE and Indian economies to an even more enthusiastic discussion about the “new” US-Indian relationship.

President Modi has just returned from a recent state visit to Washington where the bonhomie with President Joe Biden was just as warm as anything that was to come with the UAE president.

Delhi had signed up for joint deals on a wide range of US technology, with memorandums of understanding covering everything from fighter jets and drones to semi-conductors and mobile phones.

Given that India has always stressed its traditional policy of non-alignment in the geo-political sphere, the enthusiasm for Uncle Sam took me aback.

“This is the way forward for us,” one said. “We need technology to overtake China in economic terms, and to bring our people up, and to make ourselves secure.”

And there is the essence of the attraction of the US for India.

An alliance with Washington has the potential to neutralise both China and Pakistan in the south-Asian/Pacific region and improve living standards in India, where per capita income is still less than $2,500 per year.

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