RBI may urge banks to promote direct rupee-dirham settlement.

17 Aug, 2024

RBI may urge banks to promote direct rupee-dirham settlement.

The Reserve Bank of India (RBI) has advised banks engaged in trade with the United Arab Emirates (UAE) to settle part of their transactions directly in rupees and dirhams. Although no specific targets have been set, banks are required to report these transactions to the RBI regularly. This guidance is part of India's broader strategy to promote rupee-based trade settlements and reduce reliance on the U.S. dollar.

The RBI’s push for direct rupee-dirham settlements comes after efforts by the Indian government, including Prime Minister Narendra Modi's 2023 visit to the UAE, to strengthen local currency trade ties. Additionally, the RBI is encouraging banks to develop a rupee-dirham market by seeking matching dirham flows with other banks instead of converting rupees to dollars and then to dirhams.

The UAE is a significant trading partner for India, with an annual trade volume of about $83 billion, including $17 billion in oil imports. By settling trade in local currencies, India aims to reduce dollar outflows associated with its trade deficit with the UAE. While the process is still in its early stages, both banks and their clients are beginning to adopt this new settlement mechanism.