The recent signing of a memorandum of understanding between the Reserve Bank of India and the Central Bank of the UAE to encourage cross-border trade using the rupee and the dirham is to boost the internationalisation of the rupee.
India’s trade with the UAE has been substantial, making the rupee-dirham trade arrangement a promising prospect. As of 2022-23, the UAE ranked as India’s third-largest trading partner, with a total trade value of $84.8 billion. The UAE is a significant destination for India’s exports and a major source for India’s imports.
The central bank’s initiative to establish a rupee trade mechanism was prompted by Russia’s invasion of Ukraine in 2022, which led to an increased focus on rupee-denominated trades with countries facing sanctions from the West. However, challenges arose as India’s import bill surged, and Indian exporters became reluctant to accept payments in rupees from Russia.
UAE’s surplus rupees
Despite potential challenges, market players are optimistic about the rupee-dirham trade arrangement, considering the UAE’s role as a major source of remittances and foreign direct investments into India. The UAE’s surplus rupees can potentially be invested in Indian assets or used to pay off other countries willing to accept payments in Indian rupees, making the arrangement more sustainable.
The RBI’s move to encourage countries holding excess rupees in their vostro accounts to invest the surplus in government securities and treasury bills is seen as a positive step towards utilising surplus rupees effectively.
Unlike Russia, which has been advocating for the Chinese yuan to settle trade payments, the UAE’s lack of Chinese influence on the rupee-dirham trade pact is seen as beneficial for its expansion. The UAE’s dirham is also considered a stable currency by investors, further supporting the prospects of the arrangement.
While the goal of wider use of the rupee in foreign trade is a long-term endeavour, the rupee-dirham trade pact represents a significant step towards achieving this objective. By promoting investments and remittances between the two countries, optimising transaction costs, and enhancing settlement times, the use of local currencies in cross-border trade holds the potential to benefit both India and the UAE.
