India-UAE Local Currency Trade Settlement

India and the UAE have formalized a rupee-dirham trade settlement mechanism over the past three years, with over 15% of trade now invoiced in local currencies.

Current Adoption and Challenges

• The initiative aims to facilitate faster trade and cost reduction, rather than de-dollarisation.
• Challenges include structural bottlenecks, such as paperwork requirements and procedural delays, which hinder adoption.
• Most local currency trades are in oil and precious metals, with the majority still conducted in UAE dirhams rather than Indian rupees.

Efforts to Enhance Adoption

• Authorities are working on onboarding more banks, simplifying processes, and reducing paperwork to enhance cross-border transaction efficiency.
• There is an emphasis on simplifying processes and reducing business friction to gain momentum.
• Central banks and regulators are involved in these efforts.

India’s Broader Objective

• India aims to internationalize the rupee and expand local currencies in cross-border trade.
• The UAE is India’s third-largest trading partner, with trade exceeding $100 billion annually in the past two years.

Mechanism of the Local Currency Settlement System

• Launched in July 2023, it aims to reduce dependence on the US dollar.
• The Reserve Bank of India facilitates settlements through the Special Rupee Vostro Account (SRVA) framework.
• This allows transactions directly in rupees or dirhams, reducing exchange costs and bypassing the US dollar.
• UAE importers pay in dirhams or rupees, routed through SRVAs in India for Indian exporters to receive payments directly in rupees.

Promotional Efforts

• Efforts are underway to popularize the system through chambers of commerce and roadshows, engaging business communities on both sides.