India and UAE forged groundbreaking currency agreement, abandoning Dollar for trade transactions

India and UAE last week agreed to ditch dollars and start transacting exports/imports in their own currencies, the rupee and dirham. The agreement – between the Reserve Bank of India (RBI) and Central Bank of the UAE (CBUAE) which was followed by a visit by Indian prime minister Narendra Modi to Abu Dhabi has led to the two nations abandoning dollar payments generally done through the SWIFT network.

The agreement will also seek to streamline payment services in both countries by linking their instant payment platforms, local payment card systems, and financial messaging systems, the two nations said in a joint statement.

As per officials, the India-UAE trade, by value, has seen significant traction, estimated to have hit some $85bn. Both sides have vowed to boost that level to $100bn under the trade deal, which launched in May 2022.

The center has been vigorously pushing for ‘rupee-denominated’ transactions as the US dollar appreciated considerably against the rupee. And Ukraine-related Western sanctions on Russia meant India’s long-time strategic partner found itself out of international payment modes.

As RBI, pushed the passage of an alternative currency trading policy, some 18 countries have reportedly expressed interest in trading in the rupee, including Sri Lanka, Germany, the UK, and Singapore. With exchange taking place in Rupee, opens an opportunity for Indian exporters/importers to mitigate the risk of exchange rate fluctuations amid growing profitability challenges.

With this new agreement, Exporters and importers between India and the UAE will have a more streamlined and cost-effective trade transaction.

Meanwhile, Indian merchandise exports, by value, plunged 22% year on year last month, the steepest monthly decline in three years, while fiscal year Q1 (April-June) saw a 15% drop, according to new data.
As a consequence, the Indian apparel industry, which had bet on the trade diversification opportunity, is facing serious demand challenges, according to market sources. They said mounting losses had already forced some textile mills in southern India, particularly Tamil Nadu, to scale down capacity or even shut production temporarily.

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