NEW DELHI: The Reserve Bank of India (RBI) is encouraging banks to promote trade settlement with the UAE in local currency, according to reliable sources.
The move aims to reduce the outflow of dollars from India and provide benefits to traders by facilitating trade in local currency. In 2022-2023, India had a trade deficit of $21.62 billion with the UAE, and trading in local currency is seen as an effective strategy to address the outflow of dollars.
A senior banking official said the significance of trading in local currency between India and the UAE, considering the substantial bilateral trade and the presence of a significant number of Indian workers in the UAE. Trading in dollar incurs extra costs for traders who must pay commissions to banks.
“Trading in local currency offers cost advantages over using a third currency like the dollar. By promoting local currency trade, India can reduce its reliance on the dollar and strengthen the value of the rupee. RBI’s initiative is expected to have positive implications for India’s trade balance and currency stability,” he said.
However, the two banking sources denied the reports that RBI is ‘nudging’ the banks to push for local currency trade with the UAE. They said RBI employs a range of strategies to effectively implement its policies but does not necessarily force them.
India and the UAE had signed a comprehensive economic partnership agreement (CEPA) a year ago to boost merchandise trade between the two countries to $100 billion over the next five years.
In March 2023, the trade between India and the UAE saw a significant rise, reaching over $84 billion. This marked a 16% year-on-year rise, despite the global trade downturn, as reported by the Ministry of Commerce and Industry (MOCI).