In an exciting development that could revolutionize India-UAE bilateral trade, a new rupee-dirham payment mechanism is likely to be announced during Indian Prime Minister Narendra Modi’s imminent visit to Abu Dhabi. This groundbreaking change comes as India seeks more efficient and cost-effective ways to handle trade settlements, particularly for oil, which constitutes a significant chunk of India’s imports from the UAE.
Date: July 15, 2023
Place: New Delhi, India
In the fiscal year leading to March, the UAE emerged as India’s fourth-largest oil supplier. Traditionally, India, the world’s third-largest oil importer, has been paying for UAE oil in dollars. The new mechanism offers a refreshing departure from this system, eliminating expensive dollar conversions and reducing transaction costs.
Last year, the Reserve Bank of India (RBI) proposed a framework for settling global trade in rupees. This impending announcement seems to be the first practical application of the concept. Moreover, it falls in line with India’s ambitious plan to expand similar local currency arrangements with other countries to spur exports amidst a global trade slowdown.
Insiders privy to the details believe that the Abu Dhabi National Oil Co (ADNOC) could be the recipient of India’s first rupee payment for UAE oil. Although both India’s foreign, oil, and trade ministries and ADNOC remained tight-lipped when asked to comment, sources within the government suggest that discussions about the new mechanism are advanced, and its launch could be imminent.
A government source disclosed to Reuters that both countries’ central banks are on the brink of finalizing the agreement, fuelling speculations that it could be launched during Prime Minister Modi’s single-day visit. During his visit, Modi is slated to hold talks with Abu Dhabi President Sheikh Mohamed bin Zayed Al Nahyan.
Once the RBI resolves initial challenges, it plans to provide guidelines for banks on rupee trade in a couple of days. The UAE, like other oil-rich gulf states, imports between 80-90% of its food, highlighting the importance of securing supply chains.
The UAE has committed $2 billion to support the development of “food parks” in India, aimed at addressing food insecurity issues in South Asia and the Middle East. Last month, India’s trade minister announced that both nations aim to boost non-petroleum bilateral trade to $100 billion by 2030. The UAE also serves as a crucial trading hub, providing India with further access to markets in Africa and Europe.
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