India and the United Arab Emirates (UAE) have officially initiated trade using their respective local currencies, marking a significant shift away from the dominant use of the US dollar in international transactions.
The Indian government announced a landmark transaction wherein Indian Oil Corp purchased one million barrels of oil from the Abu Dhabi National Oil Company using Indian rupees instead of the US dollar. This move comes on the heels of another notable trade event, where a UAE gold exporter sold 25 kg of gold to an Indian buyer for approximately Rs 12.8 crore ($1.54 million) in a similar currency-to-currency exchange.
The implications of these transactions have prompted discussions about the potential impact on the global standing of the U.S. dollar.
Trade reforms
Last year, the Reserve Bank of India introduced a new framework to settle global trade using the Indian rupee. This concept became a reality last month when India, one of the world’s largest oil importers, established two agreements with the UAE. The first agreement focused on conducting trade in their respective local currencies, aiming to streamline transactions and reduce the need for dollar conversions. The second agreement involved the creation of a real-time payment link to simplify cross-border money transfers.
These agreements aim to facilitate smooth cross-border transactions and payments, fostering enhanced economic collaboration, as stated in a recent announcement by the Reserve Bank of India.
De-dollarisation trend
India and the UAE are not alone in their efforts to diminish reliance on the U.S. dollar. Various influential countries, including China and Russia, have expressed interest in reducing the dollar’s role in international trade due to concerns over aggressive US sanctions and foreign policies.
This global trend, commonly referred to as “de-dollarisation,” has gained momentum, raising questions about the future dominance of the U.S. dollar. Nonetheless, US Treasury Secretary Janet Yellen has reaffirmed that there is currently no currency capable of supplanting the greenback.
Yellen’s statement comes after a decline of 8% in the dollar’s share of global reserves in 2022. Central banks around the world have been diversifying their reserves by reducing their holdings of US dollars and increasing investments in assets like gold.
In this evolving landscape, the shift toward local currency-based trading between India and the UAE highlights the broader global effort to reshape the international financial system and lessen dependence on the US dollar.
