Five banking sources told Reuters that the Indian central bank has told banks dealing with the UAE to settle at least part of their trade payments directly using the Indian rupee and the UAE dirham.
The Reserve Bank of India (RBI) has not set a specific target for banks, but has asked them to regularly report the size of these payments, she said.
These sources declined to publish their names because they are not authorized to speak to the media, according to Reuters.
The guidelines are larger than the central bank’s call to banks in 2023 to facilitate such payments after Prime Minister Narendra Modi’s visit to the UAE. The Reserve Bank of India did not respond to an emailed request for comment.
The move comes as India seeks to increase settlement of trade transactions in rupees and reduce dependence on the dollar, something most countries aspire to. The Bank for International Settlements said that nearly half of global trade is denominated in dollars.
Reuters reported earlier that in addition to pushing for settlement of transactions in rupees and dirhams, the Indian central bank has renewed discussions to develop a mechanism to expand local currency trade with Russia.
Reuters also reported last year that Indian refiners had started paying for most of the Russian oil they buy via Dubai-based traders in dirhams instead of dollars.
The Indian central bank said banks should first seek a “matching flow” of dirhams from another bank when making payments to the UAE, to encourage the development of the rupee-dirham market, one of the sources said.
In practical terms, this means that banks will seek the rupee-dirham rate from another bank and avoid going to the market to convert rupees to dollars first and then dollars to dirhams.
The UAE is India’s third-largest trading partner, with annual bilateral trade at about $83 billion in the 2023-24 fiscal year ending in March, according to government data. Trade between the two countries includes more than $17 billion in oil and related imports to India.
India’s trade deficit in goods with the UAE is estimated at $12.4 billion in 2023/24. Settling trade transactions in local currencies would help reduce dollar outflows due to the trade deficit.
A second source, with direct knowledge of the matter, said the RBI had not directed banks to convert all dirham payments in this way, but was instead taking steps to encourage the development of a rupee-dirham swap market.
He also said that after the central bank’s message, “banks may be more inclined to look for a similar flow (of dirhams)” rather than converting dirhams directly into dollars, which is the current practice.
While banks and customers appear open to adopting the mechanism, it is still at an “early stage,” said a third source, also a senior banker.
