New Delhi India and the United Arab Emirates can start by settling about a quarter of bilateral trade in local currencies, covering only the non-oil segment of trade. According to two government officials, it would probably start with a few banks on each side and be scaled up later.
The rupee-dirham payments agreement follows months of technical discussions between the two sides and a meeting between Reserve Bank of India Governor Shaktikanta Das and his UAE central bank counterpart Khalid Mohammed Balma in Abu Dhabi last month.
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“The RBI governor recently had a meeting with his counterpart… UAE has shown intent to go ahead with rupee-dirham trade. They want to do it… but we need to see how much they will agree. We can start with 20-25% business in local currency and then increase it. In case of currency devaluation, both the parties should not lose money, so a mechanism has to be devised,” said an Indian government official.
The move will be an expansion of the RBI’s rupee payment settlement mechanism announced in July, which aims to settle payments with countries facing sanctions through special Vostro accounts. UAE is not under sanctions. But UAE wants to reply to India on this. This is the first time the UAE is doing this, so it will take some time.”
India and the UAE signed a Comprehensive Free Trade Agreement in 2021 and are looking to take non-oil bilateral trade to $100bn by 2026.
The trade deficit between India and the UAE stood at $17.4 billion in the April-December period, and stood at $2.14 billion for non-oil trade. Non-oil trade accounted for almost half of the overall bilateral trade of $32.86 billion in the April-December period.
Email queries sent to representatives of the Reserve Bank of India, the Ministry of Commerce and Industry and the UAE government on Monday did not elicit any response.
However, experts argue that the volatility of the rupee and UAE’s trade surplus with India could affect its take-off. The Indian rupee slipped nearly 10% against the dollar in 2022 as the Federal Reserve tightened interest rates to curb inflation. There is a trade deficit with India. UAE from 2019-20, as India buys more oil from the West Asian nation.
Madan Sabnavis, Chief Economist, Bank of Baroda, said, “This means there will be no demand for dollars. foreign exchange side.
“The new payment mechanism will be an additional option in addition to the existing payment options and is thus a welcome one. Exporters prefer dollars or euros because of the forward premium which provides them 2-3% additional profit. Federation of Indian Export Organization (FIEO) director general and CEO Ajay Sahai said, when exporting in local currency, they lose on that but then are also insulated from exchange risk.
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