The Reserve Bank of India (RBI) is actively promoting the use of local currencies, specifically the dirham (AED) of the United Arab Emirates (UAE) and the Indian rupee (INR), for trade settlements between the two nations. This initiative comes as part of the RBI’s broader strategy to strengthen trade ties with countries where India faces a trade deficit. The primary aim is to expand the global influence of the Indian rupee.
In the fiscal year 2022/23, India encountered a trade deficit of $21.62 billion with the UAE, accounting for a significant 8.2 percent of its overall trade deficit. Seeking a solution to this economic challenge, both nations have recently taken a significant step by agreeing to facilitate trade using the Indian rupee instead of relying on the US dollar. This shift is intended to reduce the outflow of dollars due to the trade deficit.
Various sources within the banking sector have confirmed that the RBI has issued a directive to encourage businesses and corporations to gradually transition towards INR-AED trades instead of relying on the US dollar. According to a treasury official from a private bank, the RBI conveyed this message during a seminar for foreign exchange dealers, although this communication remained undisclosed until now.
The official stated, “The RBI’s instruction to banks is to gradually encourage clients and corporations to initiate INR-AED trades, moving away from the dollar.” Although the RBI has not officially commented on media queries, an insider from the government quoted in the Reuters report suggested that the RBI might contemplate setting internal targets to shift a portion of the India-UAE trade away from the dollar.
Furthermore, the central bank has demonstrated its dedication to supporting banks in executing INR-AED trades, showcasing a keen interest in elevating the volume of such transactions. While exact data regarding the extent of cross-currency trade volumes isn’t readily available to the public, several banking professionals have pointed out that the current volume remains relatively modest.
Despite this, the RBI is actively encouraging substantial clients and corporations, especially those with robust financial positions, to engage in INR-AED trades. To motivate smaller enterprises, bankers have been offering reduced service charges to foster and popularize these transactions. This incentive-driven approach is expected to encourage wider participation in the shift towards local currency-based trade settlements.
In conclusion, the Reserve Bank of India is driving efforts to bolster trade relations with the UAE by promoting the use of the dirham and the Indian rupee for trade settlements. This strategic endeavor, aligned with the RBI’s goal of reducing trade deficits, is set to enhance the international standing of the Indian rupee. While initial trade volumes remain modest, the RBI’s active support and incentives for businesses are expected to pave the way for increased adoption of local currency transactions.