Home / Politics / Policy /  Das to visit UAE for rupee-dirham deal

ABU DHABI/ MUMBAI : Reserve Bank of India (RBI) governor Shaktikanta Das will visit the United Arab Emirates at the end of this month to thrash out a rupee-dirham trade settlement system with his UAE central bank counterpart Khaled Mohammed Balama.

Several rounds of technical discussions have already taken place between the two central banks over the last two months to facilitate payments in non-dollar terms, for non-oil transactions to begin with.

The move is set to broaden the RBI’s rupee payment settlement mechanism announced in July. While that mechanism is aimed at settling payments with countries facing sanctions through special Vostro accounts, the talks with the UAE show an intent to broaden the initiative.

The local currency settlement of trade will begin with one or two banks on either side and later be scaled up, according to sources.

Two people aware of the matter told Mint that a high- level visit around the end of January will firm up the rupee-dirham payment settlement mechanism.

“RBI governor is visiting the UAE next week and is expected to hold a slew of discussions with his UAE central bank counterpart. The two sides will likely work towards an initial agreement," said a person in the know.

India’s ambassador to the UAE Sunjay Sudhir told Mint that talks on a trade settlement mechanism are at an advanced stage and will help lower the cost of transaction. He said it will be scaled up in a gradual manner.

“We feel that an INR-AED mechanism will help trade, bring down the transaction cost and de-risk a lot of transactions. We have shared a concept paper; now discussions have gone far beyond the concept paper.

The RBI is in active consultation with the UAE central bank and they are discussing that matter… technical discussions are happening," said Sudhir. “What we have in mind is to do it as soon as possible. It has to be a robust mechanism. It will be done in a graduated way—open up a few banks on both sides and then expand…. our central banks are discussing and I will leave it at that," added Sudhir.

The RBI in July introduced a rupee settlement system for international trade through the special Vostro account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.

Countries including Mauritius, Sri Lanka, and Sudan have also shared intent to settle trade in rupee.

Queries emailed to the Reserve Bank of India, the ministry of finance and the UAE government representative on Saturday remained unanswered till press 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 in the April-November period in the current fiscal widened to $16bn from $10bn in the corresponding period last year.

While overall exports grew by 19% in the first eight months of 2022-23 to $20.8bn, imports are 32% higher at $36.9bn.

India has had a trade deficit with the UAE since 2019-20, as India is buying more oil from the West Asian country. The UAE is keen to settle non-oil trade with India in local currency to begin with.

Incidentally, India’s trade deficit with the UAE in non-oil terms has also widened marginally compared to last year to $1.9bn in the April-November period from $1.1 bn.

“India should take urgent steps to establish local currency settlement with all major oil suppliers. China has already created Shanghai Petroleum and Natural Gas Exchange and is negotiating with OPEC countries to trade oil in Yuan through the exchange. Chinese premier Xi Jinping visited Riyadh in early December last year," said Ajay Srivastava, co-founder of think tank GTRI.

He added more local currency trade will reduce the pressure on the rupee and help in combating inflation.

“Rupee trading in the past has suffered from procedural glitches. For it to be a success, the RBI must notify clear procedure and direct all banks to use it," he said.

Nikita Singla, Associate Director at Bureau of Research on Industry and Economic Fundamentals, said, “As the world economy is heading towards a recession, India is striving hard to insulate its economy and yet increase its share in world trade.

The rupee-dirham payment settlement will drive down not just the cost of trade transaction between India and the UAE, but also India’s dependence on US dollar. Growing number of such arrangements will strengthen the value of rupee, reducing the cost of imports and in turn, the fiscal deficit."

Madan Sabnavis, chief economist, Bank of Baroda said that rupee trade works well on a bilateral basis, only if both countries can benefit.

“As there is a deficit for one nation it would be to its advantage. This is a positive step if groups of countries can accept one another’s currency. As the UAE consists of multiple kingdoms there is scope to try it out," he said.

While India and Russia have officially started settling trade in local currency, it is yet to take off smoothly, according to exporters.

So far nine Indian banks have been given the go-ahead to open as many as 17 special Vostro rupee accounts for trade settlement with Russia. However, exporters have flagged that most banks are still awaiting standard operating procedures (SOP) from the RBI with regard to the settlement mechanism to take it forward, thereby slowing down the initiative.

Besides, banks are apprehensive and reluctant to push the rupee payment mechanism due to uncertainty and perceived risks. Some banks are still in the process of completing the formalities for a special Vostro account with their counterparts.

The Indian ambassador to the UAE said that the India-UAE local currency trade settlement experience will be different. “India-Russia trade is of a different nature. India-UAE trade is much more substantial and much more balanced. There is a trade deficit with the UAE, but it is not that high," said Sudhir.


Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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