India Expands De-dollarization Push by Settling Trade With UAE in Rupees

Indian rupee notes at a bank in Kolkata on July 15. India unveiled a symbol for its rupee currency that it hopes will become as globally recognized as signs for the dollar, the yen, the pound and the euro. Deshakalan Chowdhury/Getty Images

India and the United Arab Emirates (UAE) will begin settling bilateral trade in local currencies, starting the new arrangement by completing a recent rupee-denominated crude oil payment.

Indian Oil Corp., the nation’s top crude refiner, purchased 1 million barrels of oil from Abu Dhabi National Oil Co. and made payment in rupees rather than U.S. dollars, according to a statement published by India’s embassy in the UAE.

It was a notable transaction in global energy markets and in international finance because about 80 percent of global oil sales are completed in dollars.

For many years, major oil markets have exclusively traded crude in dollars, leaving industry observers to suspect that this could lead to a new normal in the worldwide oil and gas sector.

While the India–UAE transaction generated global headlines, it wasn’t surprising since the two countries had established a memorandum of understanding in July. The agreement features a provision to settle bilateral trade in rupees instead of dollars.

The decision seeks to reduce dollar dependence, eliminate greenback conversions, slash transaction costs, and create a real-time payment link for cross-border trade.

India–UAE trade was about $84 billion in 2022, up by 68 percent from the previous year.

“The manner in which ties between our countries have expanded, you have made a big contribution to that. Every person in India views you as a true friend,” Prime Minister Narendra Modi told UAE President Sheikh Mohamed bin Zayed Al Nahyan at an event last month.

Indian Prime Minister Narendra Modi. File Photo

It wasn’t the first time that New Delhi purchased oil with a currency other than the U.S. dollar. In March, India—the world’s third-largest oil importer—reportedly acquired Russian energy in nondollar currencies, including the UAE dirham and the Russian ruble.

The rupee (INR) has had a presence in international trade as it had been accepted by several Gulf countries, including Kuwait, Qatar, and the UAE, in the early 1960s.

The rupee was also ubiquitous in India’s trade with Eastern Europe. But these arrangements eroded heading into the 1970s, at a time when dollar hegemony accelerated.

Since World War II, the U.S. dollar has served as the chief reserve currency of the global economy, playing a dominant role in the international trade and financial system.

The reaction to Russia’s invasion of Ukraine, which resulted in Moscow essentially being dismissed from dollar-dominated markets, spooked other states that might next be considered targets of Western-led sanctions.

The anti-dollar initiative embraced by India and a growing list of other nations have often been discussed as a mechanism to circumvent financial penalties, with economists and market analysts repeatedly warning that freezing about $300 billion of Moscow’s dollar reserves would enable more economies to de-dollarize.

India has ostensibly been one of those states.

Last year, the Reserve Bank of India (RBI) proposed a framework to manufacture trade agreements that feature local currency settlements as part of broader efforts to bolster exports amid sluggish international trade.

Officials say using local currencies can enhance bilateral trade relations and allow countries to allocate surplus balances to local assets, be it corporate bonds or government securities.

This year, financial institutions from 18 countries—including Bangladesh, Israel, New Zealand, Russia, and the UK—have been approved by the RBI to open special vostro rupee accounts (SVRA) to settle payments in rupees.

Whatever the objective is, India is successfully amplifying commerce with countries by engaging in trade in dollarized and de-dollarized zones.

That would support the case that the rupee could be internationalized moving forward, according to the RBI’s Inter-Departmental Group (IDG).

“The IDG feels that INR has the potential to become an internationalised currency as India is one of the fastest growing countries and has shown remarkable resilience even in the face of major headwinds,” the central bank’s working group said in a report.

“Further, India has made appreciable progress in terms of capital account convertibility, global value chain integration, setting up of [the] Gujarat International Finance Tech (GIFT) City.

“The higher usage of INR in invoicing and settlement of international trade, as well as in capital account transactions, will give INR a progressively international presence.”

The central bank issued the report as Mr. Modi has been on a year-long campaign to champion the benefits of internationalizing the rupee, which apparently involves digitizing the currency.

In his 2022 budget address, the prime minister announced “the virtual form of our standard physical currency and  [it] will be overseen by the RBI” that he thinks “will strengthen the digital economy.”

At the same time, while the worldwide de-dollarization initiative has picked up steam over the past 18 months, experts agree that it will take a while before the dollar is dethroned as king.

According to the Bank of International Settlements (BIS), the U.S. dollar accounts for about 90 percent of global foreign currency transactions. By comparison, the rupee represented 0.01 percent of global trade.

Still, the RBI thinks now is an opportune time.

“It, therefore seems evident, that while the U.S. dollar’s 50-year-long dominance remains unchallenged for now, it has started to erode slowly, and the economic order will have to evolve to look beyond the U.S. dollar in the future,” the RBI wrote.

In the end, the rupee has been on a downward trend since 2008, hovering near all-time lows of about 80 rupees per dollar.

Earlier this year, central bank data revealed that the RBI accumulated hefty amounts of dollars, boosting the country’s foreign exchange war chest of $600 billion.

The latest resurgence in the greenback has also weighed on the rupee and other Asian currencies.