India and the UAE recently completed their first transaction in rupees for crude oil from the Emirates. A major shift in how global trade is conducted, typically done in dollars, this step is a significant boost to the growing trade between India and the UAE, which is likely to surpass the $100 billion target within a few years. Businesses and traders from both countries welcomed this move as an important part of their cooperation. It opens the door for better economic partnership and simplifies international financial dealings.
After the Comprehensive Economic Partnership Agreement (CEPA) was signed in 2022, trade between the UAE and India increased to $85 billion. The UAE became India’s third-biggest trading partner and the second-biggest export market in the fiscal year 2022-23. In turn, India ranked as the UAE’s second-largest trading partner.
For India, which is the third-largest energy consumer in the world, using its own currency for payment is a significant step in its strategy to reduce reliance on the widely-used dollar and to increase the global use of the Indian rupee. This aligns with the BRICS, of which India is a member, strategy to shift away from the US dollar as the dominant global reserve currency.
Experts in the oil industry mention that using the rupee for trade payments is a step by the world’s fifth-largest economy to broaden its oil supply sources, reduce the cost of transactions, and position its currency as a practical option for settling trade deals.
Experts in currency matters explain that trading using the rupee removes the necessity of converting into another currency for import or export payments, and aids in preserving foreign exchange reserves. Making the Indian rupee more widely used internationally could lower India’s borrowing costs and help establish the rupee as a recognized payment medium for global trade transactions. As the rupee gains popularity in international trade transactions, it might eventually reach the status of a strong currency, similar to the US dollar.
The initiative to use the rupee for payments is in line with the Reserve Bank of India’s (RBI) decision on July 11, 2022, which permits importers to make payments in rupees and allows exporters to receive payments in the local currency. Since then, India has taken measures to enhance the role of the rupee in international payments, authorizing over a dozen banks to conduct trade settlements in rupees with 18 different countries. India has been actively persuading other major oil exporters, including Saudi Arabia and Russia, to accept the Indian rupee for their trade transactions.
During Prime Minister Narendra Modi’s trip to the UAE in July, the Central Bank of the UAE and the Reserve Bank of India signed two agreements. The first agreement aimed to create a structure for using local currencies in international transactions, while the second focused on connecting their payment systems. After the deal with the UAE on rupee settlements, the Indian Oil Corporation paid for one million barrels of crude oil from Abu Dhabi National Oil Company using Indian rupees. Some of India’s oil imports from Russia have also been paid for in rupees.
India’s Commerce and Industry Minister Piyush Goyal said that India has been working with the UAE to increase bilateral trade to a $100 billion target. Speaking at the 11th Meeting of the UAE-India High-Level Joint Task Force in Abu Dhabi, where multiple MoUs were signed across various sectors, Goyal predicted a substantial increase in investments in public markets, manufacturing, and services soon. He emphasized the boundless potential of these collaborations, saying, “Even the moon is not the limit.”
During the fiscal year 2022-23, from April 2022 to March 2023, India imported 232.7 million tonnes of crude oil for $157.5 billion from Iraq, Saudi Arabia, Russia, and including the UAE, with the Middle East accounting for 58 percent of the total imports. Less than 15 percent of India’s oil needs are met by its own production. (IPA Service)
(The author is a Bengaluru-based Defence, Aerospace & Political Analyst)
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