India’s push for local currency transaction in bilateral trade with countries, including the UAE, gathered momentum, with the country’s finance ministry top officials meeting CEOs of country’s top banks on Monday to thrash out issues to promote cross-border trade in rupee.
The meeting comes in the backdrop of banks from countries such as Mauritius, Sri Lanka and Russia getting approvals from India’s Reserve Bank of India (RBI) for opening special accounts – namely Vostro accounts – with Indian banks to facilitate overseas trade in rupee accounts.
A senior official who was part of the Monday meeting told Arabian Business that while the UAE and Saudi Arabia are also keen to start local currency-pegged trade with India, the process will start when banks from these countries approach their counterparts in India to open Vostro accounts, which, in turn, then seek the RBI approvals for them.
“We expect the process [Vostro account opening by UAE and Saudi banks in India] to start soon,” the official said.
The official said the federal government has already given clearances for approvals for such transactions and now it was up to the banks to ensure its implementation at branch levels.
“It was also clarified at the meeting that there was no need for either exporters or importers to open separate accounts for such trade deals and they can do payment settlements on such deals through banks with Vostro accounts,” the official said.
Arabian Business reported on November 25 that the UAE Central Bank was in discussion with India’s central bank to develop a local currency-based trading mechanism to encourage bilateral relations between the two well-established partners.
The finance ministry meeting on Monday was also attended by senior officials of external affairs and commerce ministries, besides top executives of the country’s leading private banks, reflecting the seriousness with which it is moving on the issue.
Though India has mooted the idea of switching over to rupee trade with some of its long-term trading partners, it actually implemented such a mechanism only in rare cases with countries such as Iran and Russia.
The move, however, gathered steam in the backdrop of the West-led economic sanctions on Russia following its war with Ukraine.
The UAE is among the countries with which India is seriously discussing implementing the local currency bilateral trade mechanism.
The central banks of the two countries are in discussions over drawing up a mechanism which will allow a percentage of trade to be covered directly through dirham-rupee transactions.
“India has prepared a concept paper (regarding rupee-dirham trade) and has shared it with the UAE,” Arabian Business reported, quoting India’s ambassador to the UAE Sunjay Sudhir.
The Indian envoy also revealed that the UAE central bank has designated a nodal person for this.
The objective of allowing cross-country trade transaction settlements in local currencies is to cut down on foreign exchange risk for traders, thus reducing the cost of transaction.
In bilateral trade, importers and exporters lose money during currency exchange.
Financial sector experts said the success of the move will depend on the partner countries’ views on the strength and stability of the Indian currency.
“Though rupee may be facing high volatility currently, it’s mainly on account of the high interest rate in the US. Since the high US interest will not be tenable, the rupee will emerge as a strong and stable currency in the long-term. Hence it will be advantageous for countries like the UAE to opt for local currency settlement for bilateral trade, at least a good part of it,” R Rajaram, a financial sector expert and former finance director of a British MNC in India, told Arabian Business.
He said the move will be highly beneficial for companies as it would help them to remove the exchange rate risk.
Both exporters and importers go for forward cover to manage exchange rate risk for their cross-country trade, which add to their cost of operations of such trade.
UAE is India’s third-largest trade partner and second-largest export market.
The country and the UAE signed a free trade agreement earlier this year and hope to see $100bn bilateral trade in the next five years.
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