India, UAE Accelerate Efforts To Boost Rupee-Dirham Trade Settlements

More than 15% of trade between India and the United Arab Emirates (UAE) has been invoiced in local currencies since the rupee-dirham settlement mechanism was formalised nearly three years ago, according to India's ambassador to the UAE.

The two countries are now working to widen adoption further, with the goal of speeding up trade facilitation and cutting costs rather than pursuing de-dollarisation. According to the ambassador, Deepak Mittal, the settlement system is performing well despite some structural headwinds that have slowed broader uptake.

Where The Friction Lies

Industry feedback has pointed to paperwork requirements, duplication of processes and procedural delays as the main obstacles holding back faster adoption. Industry executives said the mechanism was currently largely limited to oil and precious metals transactions, with more invoicing still being done in UAE dirhams than Indian rupees.

To remove these bottlenecks, authorities on both sides are focusing on onboarding more banks, standardising procedures and reducing paperwork. Central banks, commercial banks and other stakeholders are working together on solutions to make cross-border transactions smoother.

Why This Matters

The UAE is India's third-largest trading partner, with bilateral trade crossing $100 billion in each of the last two years. India’s renewed push for expanding local currency settlement comes as part of its broader effort to internationalise the rupee and reduce reliance on the US dollar in trade with key partners that have strong financial linkages with India.

How The Mechanism Works

The India-UAE Local Currency Settlement System was launched in July 2023 to reduce dependence on the US dollar, lower transaction costs and strengthen financial connectivity between the two countries.

These settlements are facilitated by the Reserve Bank of India under the Special Rupee Vostro Account framework which allows businesses to invoice and settle transactions directly in either rupees or dirhams. Under this system, UAE importers pay in dirhams or rupees, which are routed through Special Rupee Vostro Accounts in India, allowing Indian exporters to receive payment directly in rupees without converting every transaction through the US dollar.

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What Comes Next

According to the ambassador, the priority now is to popularise the system more widely among business communities in both countries. This will involve engagement through chambers of commerce and dedicated roadshows aimed at increasing awareness and participation among businesses that have yet to adopt the mechanism.

Source:

The Economic Times