Trade

India pushes for more rupee-dirham payment in UAE trade

August 19, 2024, 7:07 AM

The push for rupee-dirham transactions follows a framework agreement signed in July 2023 between the central banks of India and the UAE

Rupee-dirham market encouraged
Reduction in US dollar dependence
UAE-India trade worth $84bn in 2023

India’s central bank has told lenders dealing with the UAE to settle at least part of their trade payments directly using the rupee and dirham.

The Reserve Bank of India (RBI) has not provided specifics of the targets, but has asked banks to report back the extent of rupee or dirham-denominated payments, Reuters reported, citing five unnamed sources.

To encourage the development of a rupee-dirham market, the RBI said banks should first seek “a matching flow” in dirhams from another bank when payments are to be made to the UAE, a source said.

This would mean that banks would seek a rate for the dirham-rupee pair from another bank, while avoiding going to the market to first convert rupees to dollars and then dollars to dirhams.

You might also like:
Economic indicators from every GCC country

The source said that RBI has not instructed banks to shift all dirham payments to this channel but is taking steps to encourage the development of a rupee-dirham market.

India is the UAE’s second-largest trading partner after China, and its largest export market. India had a merchandise trade deficit of $12.4 billion with the UAE in 2023-24.

“Encouraging the greater use of dirhams and rupees by Indian banks in servicing UAE-India cross border trade could encourage trade growth,” Freddie Neve, senior Middle East associate at Asia House, said.

“It could reduce the cost of trade by eliminating transaction fees on US dollar conversions, making it cheaper and easier for businesses on both sides to engage with each other’s markets.”

Trade between the UAE and India rose from $73 billion to $84 billion between 2021 and 2023 and is expected to surpass $100 billion by 2030.

Approximately half of world trade is denominated in dollars, according to the Bank of International Settlements. India and many other countries have been trying to reduce their dependence on the US dollar in trade.

As part of this effort in July 2023 India struck a deal with the UAE for rupee settlements on crude oil and purchased 1 million barrels of crude from Adnoc in Indian rupees.

At the time, Piyush Goyal, India’s minister of commerce and industry, said: “By implementing the rupee currency in UAE trade we aim to open vast trade opportunities while addressing the 5-6 percent costs incurred otherwise in currency conversion, impacting MSMEs (micro, small and medium-sized enterprises) significantly.”

Neve said: “UAE-India trade has shown significant growth since their Comprehensive Economic Partnership Agreement came into effect in May 2022.

“The Cepa aims to increase bilateral non-oil trade to $100 billion by 2030, and is encouraging this by reducing custom duties and red tape, and lowering tariffs by 90 percent.”

Two years after it was signed the Cepa agreement led to a 15 percent increase in bilateral trade between the two countries.