India-UAE Trade: Direct Deal in Rupees and Dirhams

India and the United Arab Emirates (UAE) have made a groundbreaking decision to bypass the dominance of the US dollar and establish direct settlements in their respective local currencies, the rupee and the dirham. This move is anticipated to bring a multitude of benefits for both economies, including reduced transaction costs, enhanced trade competitiveness, facilitated bilateral investments, and strengthened economic ties.

One of the key advantages of this direct currency link is the reduction in transaction costs. By eliminating the need for dollar conversions, businesses and individuals involved in cross-border transactions will save significant amounts in bank fees and avoid exchange rate fluctuations. This will make trade between India and the UAE more efficient and cost-effective, stimulating economic activity.

Furthermore, the use of local currencies in trade settlements will enhance trade competitiveness, particularly for Indian exporters. Pricing goods and services in local currencies will make pricing more transparent and predictable, potentially giving Indian exporters an edge in the UAE market. This could lead to increased demand for Indian products and contribute to the growth of India's export sector.

The direct currency link will also simplify investment flows between India and the UAE, thereby facilitating bilateral investments. With local currency settlements, investors can easily convert their funds between rupees and dirhams, eliminating the need for multiple currency conversions. This streamlined process will attract more foreign direct investment and encourage the establishment of joint ventures between the two countries, further deepening economic ties.

Moreover, the direct currency link between India and the UAE signifies deeper economic integration and mutual trust, which will strengthen the overall bilateral relationship. This move demonstrates a shift away from the traditional reliance on the US dollar and highlights the growing confidence in local currencies. It fosters a more resilient relationship between the two countries, encouraging cooperation in various sectors and opening up new avenues for collaboration.

The initiative to establish direct settlements in local currencies was formalized during Prime Minister Narendra Modi's visit to the UAE in 2023. Since then, both countries have established frameworks to promote the use of their local currencies for trade and capital account transactions. This step aligns with India's broader strategy of reducing dependence on the US dollar and promoting the internationalization of the rupee.

While this move holds immense potential, there are several challenges that need to be addressed for its successful implementation. Developing the INR-AED foreign exchange market to ensure sufficient liquidity and smooth transactions is crucial. Regulatory hurdles and technical challenges must also be overcome to establish a seamless system for conducting trade and investment transactions. Additionally, businesses and individuals will need to adapt to the new currency mechanism, requiring a period of adjustment and education.

The significance of this direct rupee-dirham trade cannot be overstated. With bilateral trade between India and the UAE exceeding $80 billion, this economic partnership holds immense value for both countries. Furthermore, the rising presence of Indian expatriates in the UAE stands to benefit from easier remittance flows through the local currency system.

Beyond its immediate impact on India and the UAE, this initiative has broader implications for regional trade dynamics and the evolving role of the US dollar in international transactions. As more countries explore alternatives to the US dollar, the global financial system is gradually becoming multipolar. Diversifying trade settlement mechanisms and reducing reliance on a single currency promotes a more balanced and inclusive global economy.

 The decision by India and the UAE to forge a direct trade path with the rupee and the dirham sends a powerful message to the global financial system. By eliminating the need for dollar conversions, reducing transaction costs, and facilitating bilateral investments, this move marks a significant step towards enhancing economic ties between the two countries. As India continues to explore opportunities to reduce dependence on the US dollar and promote the internationalization of the rupee, similar arrangements may arise with other nations, further contributing to a multipolar global financial system.