Trade between United Arab Emirates and India: National Currencies Instead of the Dollar

Two more countries of the world decided to abandon the dollar in favor of national currencies in bilateral trade exchanges. The transition to the rupee and dirham will allow India and the UAE to use national payment systems and interbank telecommunications.

Step by step, India and the Arab world countries are strengthening mutual economic and trade ties. On Saturday, July 15, the heads of the central banks of India, Shaktikanta Das, and of the United Arab Emirates, Khaled Mohamed Balama, signed a memorandum of understanding to accelerate the transition to settlements in rupees and dirhams in bilateral trade and during some other cross-border financial transactions. The signing took place during the official visit of Indian Prime Minister Narendra Modi to the United Arab Emirates, where he was received by President Sheikh Mohammed bin Zayed Al Nahyan.

A spokesman for the Reserve Bank of India (RBI, India’s central bank) stated that the new agreement is an integral part of the whole process aimed at strengthening economic and financial cooperation between the two countries.

In 2022-2023, trade volume between India and the UAE reached $84.5 billion.

This memorandum, the first of its kind, is intended to introduce a Local Currency Settlement System (LCSS) in order to encourage economic operators to use the rupee and dirham as widely as possible. The system will cover all current and capital account transactions. In addition, the introduction of the LCSS system between India and the UAE will allow export-import companies to invoice transactions and make payments in their respective national currencies, which in turn will accelerate the development of the modern exchange rate between rupee and dirham. The arrangement named “Payment and Messaging Systems” will lay the foundation for linking the two countries’ Fast Payment Systems (FPS) – India’s Unified Payments Interface (UPI) and the United Arab Emirates’ Instant Payments Platform (IPP).

In addition, the respective card switches (ruPay Switch and UAESwith) will be linked to each other, after which the possibility of linking the structured financial messaging system (SFMS) of the United Arab Emirates will be analyzed.

In 2022, India launched a campaign to internationalize the rupee. Currently, trade in Indian currency does not exceed 10 billion rupees (about $120 million) per year, which cannot satisfy the New Delhi government – especially compared to India’s entire trade volume, which was $1.2 trillion last year.

According to Reuters sources, India will be able to make its first payment in rupees for oil exported by the Abu Dhabi National Oil Co. (ADNOC).

Finally, the memorandum signed on Saturday should make financial flows much smoother between India and the United Arab Emirates, a country that is home for hundreds of thousands of Indian workers. In the period 2020-2021 (last available data – ed.), transactions from the United Arab Emirates to India accounted for 18% of all transfers sent home by Indians working abroad.