India, the UAE’s second-largest trading partner, has made its first-ever payment in rupees for crude oil purchased from the Emirates, signalling what could be a paradigm shift in dollar-denominated global trade transactions while giving a game-changing fillip to the booming two-way trade that is on track to cross $100 billion mark in a couple of years.
Businesses and traders from both sides hailed the development as a very vital aspect of bilateral cooperation, paving the way for enhanced economic collaboration while making international financial interactions simpler.
Following the signing of the Comprehensive Economic Partnership Agreement (Cepa) in 2022, the UAE-India trade rose to $85 billion in 2022. The UAE emerged as India’s third-largest trading partner and second-largest export destination in FY2022-23. Conversely, India is the UAE’s second-largest trading partner.
For India, the world’s third-largest energy consumer, the payment in local currency marks a historic moment in its strategic push to decouple from the ubiquitous dollar by promoting its currency globally. The move is also in line with the strategy of BRICS, of which India is a key partner, to replace the greenback as the world’s reserve currency. Oil industry experts said trade settlements in the rupee are part of the world’s fifth-largest economy’s broader efforts to diversify oil suppliers, cut transaction costs, and establish the local unit as a viable trade settlement currency.
Currency experts said a rupee-based trade settlement eliminates the need for conversion into another currency before paying for imports or exports, helping to save foreign exchange reserves. “The internationalisation of the Indian rupee may eventually reduce the cost of borrowing for India and helps to make the rupee an accepted mode of payment for the settlement of international trades. With the rupee becoming a popular mode of payment for global trade, it may eventually become a hard currency akin to the US currency.”
The rupee payment initiative also aligns with the Reserve Bank of India’s (RBI) move on July 11, 2022, allowing importers to pay in rupees and exporters to receive payments in the local currency. Since then, India has taken steps to boost the rupee’s role in cross-border payments, permitting more than a dozen banks to settle trades in rupees with 18 countries. India has also been encouraging other big oil exporters such as Saudi Arabia and Russia to accept its currency for trade settlements.
During Prime Minister Narendra Modi’s visit to the UAE in July this year, the Central Bank of the UAE and the RBI signed two memoranda of understanding (MoUs). While the first established a framework to promote the use of local currencies for cross-border transactions, the other was for interlinking payment systems. Following the agreement with the UAE for rupee settlements, the Indian Oil Corporation made payments for purchasing one million barrels of crude oil from Abu Dhabi National Oil Company in Indian rupees. Additionally, some Russian oil imports have also been settled in rupees.
India’s Commerce and Industry Minister Piyush Goyal said that both countries are aiming to expand the bilateral trade to make it $100 billion. Recently, addressing the 11th Meeting of the UAE-India High-Level Joint Task Force in Abu Dhabi, which saw the signing of several MoUs in different sectors, Goyal said a significant flow of investments, both in public markets and in the manufacturing and services sector, will be witnessed in the days ahead, adding: “even the moon is not the limit.”
In the financial year 2022-23 (April 2022 to March 2023), India spent $157.5 billion on importing 232.7 million tonnes of crude oil. Key suppliers included Iraq, Saudi Arabia, Russia, and the UAE, with the Middle East contributing 58 per cent of all supplies. India’s domestic supply meets less than 15 per cent of the country’s demand.