India and the United Arab Emirates, both prominent economies in South Asia and the Middle East, have recently entered into new agreements regarding the utilization of domestic currencies for conducting cross-border transactions. This particular step holds great importance in light of the current global economic trends of de-dollarization and the increasing internationalization of domestic currencies in emerging economies.
With a goal to foster the existing bi-lateral relationship, Prime Minister Narendra Modi made a state visit to the United Arab Emirates on July 15, 2023, where he engaged in discussions with Sheikh Mohamed bin Zayed Al Nahyan, the ruler and President of the nation. During this significant visit, the two leaders engaged in discussions encompassing aspects of bilateral partnership, such as trade and investment, financial technology, energy, renewable resources, climate change mitigation, and higher education. Also, two MoUs had been signed to facilitate the adoption of local currencies for cross-border transactions. The objective was to promote the utilization of these currencies in the context of international trade. To understand the transaction process, a gold exporter based in the United Arab Emirates used the Letter of Credit Security System (LCSS), which was valued at Rs 12.84 crore and involved the sale of 25 kilograms of gold.
The agreements that were executed to ensure cross-border transactions were endorsed by the Governors of the respective Central Banks. The establishment of the LCSS would promote the growth of the INR-AED foreign exchange market. The Governors of the respective Central Banks have signed an additional Memorandum of Understanding pertaining to the interlinking of payment and messaging systems. In accordance with the Memorandum of Understanding (MoU) pertaining to ‘Payments and Messaging Systems’, the two central banks have agreed to collaborate on the integration of Fast Payment Systems (FPSs), specifically the Unified Payments Interface (UPI) of India, with the Instant Payment Platform (IPP) of the United Arab Emirates (UAE). Additionally, it would establish a connection between the corresponding Card Switches, namely the RuPay switch and UAESWITCH. Furthermore, it would connect the integration of payment messaging systems, specifically the Structured Financial Messaging System (SFMS) in India, with the messaging system utilized in the United Arab Emirates (UAE). This particular cooperation between India and the United Arab Emirates (UAE) holds geo-economic importance.
In February 2022, the United Arab Emirates (UAE) and India entered into a historic Comprehensive Economic Partnership Agreement, marking a significant milestone in their bilateral relations. Since the implementation of the agreement on May 1, 2022, there has been a notable rise of approximately 15% in bilateral trade. More than 80% of the commodities exchanged between India and the United Arab Emirates (UAE) qualify for preferential market access as per the Comprehensive Economic Partnership Agreement (CEPA). The reduction in tariffs on India’s exports to the UAE has benefited various sectors, such as gems and jewelry, textiles, leather, footwear, sporting goods, plastics, furniture, agricultural and wood products, engineering products, medical equipment, and vehicles. The Comprehensive Economic Partnership Agreement (CEPA) encompasses a total of 11 expansive service sectors, along with over 100 sub-sectors. In this context, the United Arab Emirates (UAE) has effectively reduced duties on 97.45% of its tariff lines, which corresponds to approximately 99% of imports originating from India. The bilateral trade between India and the United Arab Emirates (UAE) amounted to a total value of USD 85 billion in 2022. This notable growth has positioned the UAE as India’s third-largest trading partner for the fiscal year 2022–23, as well as India’s second-largest export destination. The United Arab Emirates has made a commitment to invest a substantial amount of $2 billion towards the establishment of multiple food parks in India. By the year 2030, both parties will have mutually agreed to expand the non-petroleum trade value to $100 billion. Furthermore, Abu Dhabi Investment Authority (ADIA) intends to establish a Gujarat International Finance Technology City (GIFT City), which is a designated economic free zone located in Gujarat. This will enhance the potential for investment opportunities in India for the United Arab Emirates.
In the context of the geo-economic landscape, India has been actively advocating for the use of rupee-denominated transactions in light of the significant depreciation of the Indian rupee against the US dollar. The imposition of Western sanctions on Russia due to the Russia-Ukraine war resulted in India’s long-standing strategic partner being excluded from international payment systems. Consequently, India was compelled to make payments in Chinese Yuan for the purpose of importing energy resources from Russia. Also, the Indian apparel industry is currently encountering significant challenges in terms of demand and supply due to dollar payments. From a strategic perspective, the United Arab Emirates is a member of the Gulf Cooperation Council (GCC) and maintains strong economic connections with Saudi Arabia, Kuwait, Bahrain, and Oman. These nations also participate in a shared market and customs union with the UAE. Through this, India stands to benefit from the UAE’s advantageous geographical position and convenient connectivity to the African market, along with its extensive network of trade partners. This presents an opportunity for India to actively participate in the supply chain within this region, specifically in sectors such as handloom, handicraft, textiles, and pharmaceuticals. Furthermore, the United Arab Emirates holds the position of being the fourth-largest source of crude oil and the second-largest supplier of LPG and LNG to India. This fact adds to the significance of the process of de-dollarization. India has the potential to employ this mechanism to facilitate payments for the procurement of oil and various other commodities from the United Arab Emirates. Moreover, India is promoting the internationalization of its currency as a means of exchange, leveraging the declining dominance of the US dollar. India and the United Arab Emirates are currently exploring strategies to extend trade in gold and gold products with the aim of bolstering their gold reserves. Given that the United Arab Emirates serves as a significant supplier of gold to India, India wants to further enhance commercial relations with the UAE.
The United Arab Emirates wants to derive numerous advantages from engaging in bilateral trade transactions in dirham. The objective is to minimize expenses during transactions and mitigate the potential risks related to fluctuating exchange rates, such as the United States dollar, for the purpose of settling trade transactions. It also aims to enhance the global demand and utilization of the dirham, with the objective of increasing its credibility as a reserve and thereby stimulating tourism. Furthermore, this measure has the potential to enhance the United Arab Emirates’ economic autonomy and exert its influence not only within the region but also on a global scale. Moreover, the United Arab Emirates is strategically contemplating the advancement of non-oil industries within its economy. These sectors play a pivotal role in ensuring the nation’s economic expansion. UAE is interested in INR-Dirham transactions from India as it holds a significant position in the United Arab Emirates’ endeavors to enhance its involvement in various domains, including trade, economy, and security, with East Asian nations. However, there exist certain obstacles, including the equilibrium of payments as well as guaranteeing liquidity and stability within the INR-Dirham trade. This bilateral transaction may encounter challenges related to political and regulatory factors. Hence, the establishment of a well-defined framework and mechanism is crucial for the effective and efficient implementation of this agreement.
In the concluding remarks, it can be added that this INR-Dirham trade has the potential to facilitate increased economic collaboration between India and the United Arab Emirates (UAE). This will facilitate greater ease in international financial transactions between the two nations. This collaboration has the potential to boost tourism through the integration of domestic card schemes through interconnecting national card switches, thereby contributing to the economic benefit of both countries.