Vibrant Gujarat Summit: Rupee-Dirham Deal Follows Moves To 'Internationalise' Indian Currency

India will pay in rupees for what it imports from UAE and the latter will reciprocate in its currency, the dirham.The move to roll out local currency trading arrangements follows the success of similar deals with Russia and Kenya and is intended to 'internationalise' rupee.

India will use the rupee trading mechanism to pay for oil as well as other imports from the UAE, its fourth largest oil supplier, top oil ministry officials told The Secretariat.

Till now India, which imports some 80 per cent of its fuel needs, has been paying UAE and most of its crude suppliers in US greenbacks. India-UAE trade was worth US$ 84.5 billion in 2022-23 of which India imported US$ 53.2 billion of goods from the UAE, most of it crude.

The scope for increasing India’s exports to UAE once the transaction cost in using dollars to trade, is eliminated, is believed to be immense.

The oil-rich Sheikhdom imports nearly 90 per cent of its food requirement and wants to secure its supply chains protecting them from both price shocks as well as disruptions caused by war or terror attacks.

Analysts believe the UAE may use its rupee stocks to not only buy more but also invest in India. Gulf investments in Indian companies and realty has been rising since the end of the Covid pandemic.

India’s bid to use the rupee instead of US dollars gained importance as its import bills started going up because of the volatility in crude prices even as its currency started falling against the dollar. From a tad over Rs 60 to the dollar in 2014 to nearly Rs 84 to the dollar in 2024, the rupee has had a roller-coaster journey.

The fact that the country’s foreign trade, which has been moving at a sluggish pace in recent years, may also be helped if transaction costs involved in trading deals is reduced has lent the move a sense of urgency, said top commerce ministry officials.

India’s overall trade during the first seven month of this fiscal between April and November 2023 stood at US$ 499 billion, marginally lower than US$ 506 billion during the same time last year.

“We are trying to use the rupee for our trade deals to lower transactions costs which would rise if other third currencies like the dollar are used and at the same time to guard against currency volatility which we have seen in recent years,” said Dr Biswajit Dhar, former Director General of the Research and Information System for Developing Countries (RIS), a think-tank of Ministry of External Affairs.

The move to use the Indian currency in foreign trade gained a fillip after RBI came out with a report in 2022 pushing for the “internationalisation” of the rupee.

It had pointed out that “given the potential benefit of internationalisation of the Indian rupee in terms of lower transaction costs for cross-border trade and investment and lower exchange risks” there was a pressing need to take steps towards making the rupee a favoured currency for global trade.

The RBI declaration came in the wake of moves by China to similarly internationalise the Renminbi. China used Renminbi trade deals with African and Asian countries whose currencies had hugely devalued against the US dollar to push its currency.

Traditionally, the US dollar has dominated international trade since the last century, though older currencies such as British pound, Japanese yens, Swiss Franc and the newbie- Euro - the successor to many European currencies, are also seen as good stores of value which have stable values and can be used for global settlement of trade deals.

The Indian rupee til 1966 (when it was devalued overnight) was legal tender in the Gulf area, especially in Trucial states, Oman and Kuwait and acceptable currency in the bazaars of East Africa and Asia from Damascus to Hong Kong and Kabul to Zanzibar.

Since the 1960s devaluation, the Indian rupee is used only in neighbouring countries such as Nepal, Bhutan and Afghanistan.

Bankers said the RBI move to internationalise the rupee was followed by setting up a mechanism in July 2022, which allows invoicing, payment and settlement of exports and imports in Rupee.

Till now banks of 19 nations including the UK, Germany, Malaysia, UAE, Israel, Kenya and Bangladesh have been permitted to make trade settlements in Rupees.

The first deal in rupee was settled for trade with Russia, which had been sanctioned by the US and had problems in trading through the normal international system. Iran followed soon afterwards.

“We had had earlier Rupee-Rouble deals with Russia, but those were not so well crafted. The use of Vostro account to trade has now been much improved and the system works as a win-win for traders from all countries,” said Anup Johri, an independent merchant banker specialising in trade with Gulf and East Asian countries.

Since then, India has signed up many nations – including Kenya, Bangladesh, Sri Lanka – to trade in rupee.

Traders from both India and developing countries are keen on rupee-denominated trade to guard against the uncertainties of a volatile Dollar or Euro.

The rating agency Fitch on Wednesday said it expects higher US fiscal deficit and that along with governance implications may become key issues for the country’s sovereign rating. The US's rating was downgraded by the agency from a top AAA to AA + last year.

However, experts also cautioned against any hasty bid to pitch the rupee as global currency. “We have to understand the rupee is still not an international currency; it is in the ‘wannabe’ category. We need not push its acceptance too fast into a trading spot where the currency is stored in large quantities in other nations as this has its own implications on exchange values,” explained Dhar.