India is set to sign a Rupee-Dirham trade deal with the United Arab Emirates. Top Indian banking and finance officials are in Abu Dhabi for the three-day trip from February 21-23 to hammer out the details of the deal.
According to sources, central bank and finance department officials of the two countries have been working together since late last year to put in place a Rupee-Dirham payment mechanism. They said officials of the Reserve Bank of India and UAE Central Bank have already done the groundwork for the introduction of bilateral trade in local currencies. The deal would soon be announced by the top leaders of the two countries.
India-UAE relations have strengthened over the years and the two countries signed a Comprehensive Economic Partnership Agreement last February to facilitate an easier flow of goods and services between them. The UAE is India’s third largest trading partner after the US and China.
The two countries currently use the US dollar to settle payments. The replacement of the dollar with local currencies will result in savings on account of foreign currency conversion fees and facilitate an easier flow of capital, including remittances. It would also help India save precious foreign exchange. Trade under this new India-UAE pact will be conducted through vostro accounts of banks of the two countries.
India has embarked on an ambitious journey to reduce the use of the dollar and promote the rupee for bilateral trade. It is in an advanced stage of talks with several other countries for trade in local currencies. The decision will boost free trade between India and partner countries.
India had a Rupee-Rouble exchange mechanism with the erstwhile Soviet Union. The two countries made attempts to revive it after Western sanctions following the Russian invasion of Ukraine last year but have not been able to reach a final agreement yet. It’s still a work in progress.
They involve a local bank keeping a foreign bank’s money in local notes. It helps importers and exporters, as settlement in local currencies reduces forex risk and cost of transaction