-
Why the India-UAE deal to trade in local currencies matters
With India and the UAE starting to settle bilateral trade in their respective currencies, the move is set to further strengthen economic relations between the two countries and could provide a significant boost to exports from Asia’s third-largest economy, analysts say.
Last month, India signed an agreement with the UAE to allow it to settle trade in rupees instead of US dollars — which is widely used for India’s trade settlements.
This move aims to lower transaction costs by cutting expenses that accompany payments made in foreign currencies and the uncertainty created for businesses by fluctuating exchange rates.
The Indian rupee hit a historic closing low of more than 83 against the US dollar two weeks ago.
Foreign exchange costs present a significant expense for India in terms of its crude oil imports. The country is the world’s third-largest importer of the commodity and it pays for oil imports in the US currency, which has fluctuated a lot in recent quarters.
“There are many benefits to such a development,” says Ratnadeep Roychowdhury, co-head, private equity and sovereign wealth funds, at Indian law firm Nishith Desai Associates.
“It protects the bilateral trade from geopolitical risks and currency fluctuations. It strengthens the trading relation and underlines each country’s commitment to the other. Moreover, it helps both countries to de-risk their dependence and exposure to the reserve currencies in use today.”
The pact will have a “major impact” as “the removal of hedging costs should make [India’s] export pricing more competitive”, he added
India is the UAE’s second-largest and the UAE is India’s third-largest trading partner. Bilateral trade between the two countries increased by 16 per cent to $84.5 billion between April 2022 and March 2023 from $72.9 billion in the previous financial year, according to Indian government data.
However, India has a trade deficit with the UAE, which stood at $21.62 billion in the last financial year.
While India’s major import from the UAE is oil, its exports to the country include jewellery, refined petroleum products, food, textiles, and machinery.
The first crude oil transaction under the local currency settlement (LCS) system took place this month between Abu Dhabi National Oil Company (Adnoc) and the Indian Oil Corporation, according to the Indian embassy in the UAE.
The transaction involved the sale of about a million barrels of crude oil, settled with Indian rupees and UAE dirhams, it said.
The new payment option “symbolises the deep-rooted trust and strategic partnership between India and the UAE”, says Swati Babel, a cross-border trade finance business specialist.
Share This
