India's Central Bank Has Advised Rupee-Dirham Settlements For UAE Trade: Sources

The Indian central bank has advised banks dealing with the UAE to settle part of their trade payments directly using the rupee and dirham, according to five banking sources, Reuters reported. This directive aims to reduce reliance on the dollar and increase trade settlement in local currencies.

The RBI hasn't confirmed this announcement, Reuters report added. The RBI has not set specific targets but requires banks to report the extent of such payments regularly, the sources said. They requested anonymity as they are not authorised to speak to the media.

To foster a rupee-dirham market, the RBI has suggested that banks first seek "a matching flow" in dirham from another bank when making payments to the UAE, one source mentioned. This approach avoids converting rupees to dollars and then dollars to dirhams, simplifying transactions.

India's central bank is also renewing discussions on expanding local currency trade with Russia. Last year, Reuters reported that Indian refiners began paying for most Russian oil purchased via Dubai-based traders in dirhams instead of dollars.

The UAE is India's third-largest trading partner, with annual trade amounting to about $83 billion in the 2023-24 financial year ending March. This includes over $17 billion in oil and related imports by India. Settling trade in local currencies could help reduce dollar outflows due to India's merchandise trade deficit of $12.4 billion with the UAE during this period.

The move follows a 2023 nudge from Prime Minister Narendra Modi's visit to the UAE, encouraging banks to facilitate such payments. Despite this push, operational adoption remains in its early stages, according to a senior banker familiar with the matter.

Banks would now "perhaps be more inclined to seek a matching (dirham) flow" instead of directly converting dirhams to dollars, which is currently common practice, said a second source directly familiar with the matter. This shift aims at developing a robust rupee-dirham market without mandating all dirham payments through this channel.

Approximately half of global trade is denominated in dollars, as per the Bank of International Settlements. India's effort mirrors a broader ambition shared by many nations seeking alternatives to dollar dependency.

The RBI's initiative represents a strategic move towards enhancing bilateral trade efficiency and reducing dollar reliance. While banks and clients show openness towards this mechanism, it remains in its nascent stage, noted a third source who is also a senior banker.

This development marks another step in India's ongoing efforts to strengthen its economic ties with key trading partners while promoting local currency usage in international trade settlements.