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India is working toward initial agreement on a rupee-dirham payment mechanism with the United Arab Emirates as early as January, according to people with knowledge of the matter, as the South Asian nation looks to diversify from the dollar and boost bilateral trade links.

Officials from the nations’ central banks met last week to discuss technical possibilities while their foreign ministries are driving the talks, the people said, asking not to be identified as the details aren’t public. The system will include payment for purchases of oil and gas, the people said.

Representatives of India’s central bank and foreign ministry didn’t respond to requests for comment outside of local business hours Tuesday, while the finance ministry couldn’t be reached for comment. The central banks of India and the United Arab Emirates are discussing a mechanism to facilitate rupee-dirham trade to lower the cost of transactions, India’s ambassador to the UAE, Sunjay Sudhir, had said last month. The UAE central bank, foreign ministry and government media office didn’t respond to requests for comment.

The outreach broadens a plan announced in July that allows overseas trade to be settled in rupees, initially probably aimed at making it easier for Indian companies to trade with sanctions-hit countries such as Russia and Iran. However urgency has been building as India’s rupee weakens and bilateral pacts deepen engagement.

India has proposed to open special vostro accounts for facilitating the trade and the balance amount, if any, would be either settled in hard currency or can be used by the participating nation to invest in local equities or treasury bonds, two of the people said. 

India isn’t seeking to challenge the US dollar’s dominance with its rupee internationalization efforts, Reserve Bank of India Deputy Governor T Rabi Sankar said in a recent speech. A study by Federal Reserve Bank of New York staff shows that while financial sanctions on Russia could encourage de-dollarization by other countries, the dollar’s prime international status will remain unrivaled.

RBI Seeing Good Response on Indian Rupee Internationalization

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