Rupee-dirham trade deals may start slow

India and the UAE may start with settling only about a quarter of bilateral trade in local currencies, covering just the non-oil segment of trade. This will likely start with a couple of banks on each side and be scaled up later, according to two government officials.

The rupee-dirham payment settlement 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 Khaled Mohammed Balama last month in Abu Dhabi.

“The RBI governor had a meeting with his counterpart recently… the UAE has shown the intent to go ahead with the rupee-dirham trade. They want to do it… But we need to see how much they will agree. We may start with 20-25% trade in local currency and then scale it up. The two parties should not lose money in case currency depreciates, so a mechanism will have to be devised,” said an Indian government official.

The move will broaden RBI’s rupee payment settlement mechanism announced in July, which aims to settle payments with countries facing sanctions through special Vostro accounts. The UAE is not under sanctions.“The rupee-dirham trade settlement mechanism for non-oil could begin with one or two banks on each side and then scale up. But the UAE needs to revert to India on this. The UAE is doing it for the first time, so it will take some time,” said another official.

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 $17.4bn in the April-December period, and that for non-oil trade stood at $2.14bn. Non-oil trade accounted for about half of overall bilateral trade at $32.86bn in the April-December period.

Queries emailed to the Reserve Bank of India, the ministry of commerce and industry and the UAE government representative on Monday remained unanswered.

However, experts argue that rupee volatility and the UAE’s trade surplus with India may affect its take off.The Indian rupee slipped by around 10% against the dollar in 2022 as the Federal Reserve tightened interest rates to curb inflation.India has a trade deficit with the UAE from 2019-20, as India buys more oil from the West Asian nation.

Madan Sabnavis, chief economist, Bank of Baroda said, ”It will mean no demand for dollars. There need to be counter parties in UAE who will find use of rupees to buy from India. If this is matched it will be neutral for us on the forex side.”

“The new payment mechanism will be an additional option besides the current payment alternatives and thus is a welcome one. Exporters prefer dollar or Euro due to the forward premium which provides them 2-3% additional benefits. When exporting in local currency, they lose on it but then are insulated from exchange risk as well,” said Ajay Sahai, DG and CEO, Federation of Indian Export Organisations (FIEO).