RBI May Push for Direct Rupee-Dirham Settlement with UAE

According to five banking sources, the central bank of India has asked banks to settle at least part of their trade payments with the United Arab Emirates (UAE) directly using rupees and dirhams.

The Reserve Bank of India (RBI) has not given banks a specific target, but has asked them to report the amount of such payments on a regular basis, sources said.

They declined to identify the sources because they are not authorized to speak to the media.
After Prime Minister Narendra Modi’s visit to the UAE, banks have been advised to facilitate such payments by 2023.

Emails sent to the RBI seeking comment went unanswered.
The move is part of India’s bid to increase trade settlement in the rupee and reduce its reliance on the dollar, an ambition that has eluded most countries. According to the Bank of International Settlements, nearly half of world trade is denominated in dollars.

In addition to pushing for a rupee-dirham settlement, the central bank of India has renewed discussions to set up mechanisms to expand local currency trade with Russia, Reuters reported earlier.
Reuters also reported last year that Indian refiners had started paying for Russian oil bought through Dubai-based traders in dirhams instead of dollars.

To encourage the development of a rupee-dirham market, the Reserve Bank has said that when making payments in the UAE, banks must first obtain an “appropriate flow” in dirhams from another bank.

Operationally, banks would request the rate for the dirham-rupee pair from another bank, while avoiding going to the market to first convert rupees into dollars and then dollars into dirhams.

According to government data, the UAE is India’s third-largest trading partner with trade of around $83 billion in the 2023-24 fiscal year ending March. The trade includes more than $17 billion in oil and related imports from India.

India has a $12.4 billion trade deficit with the UAE in 2023-24. Fixing trade in local currencies helps reduce dollar outflows due to trade deficits.

The RBI has not instructed banks to shift all dirham payments to this channel, rather the move is to encourage the development of the rupee-dirham market, said a second source with direct knowledge of the matter.

Following the central bank’s communication, banks will “perhaps be more inclined to resort to a matching (dirham) flow” instead of converting dirhams directly into dollars, which is currently the dominant practice, a second source said.

While banks and customers appear to be ready to accept the mechanism, the process is still in the “beginning stage”, said a third source, a senior banker.