Report: RBI Encourages Banks to Handle UAE Trades in Rupee and Dirham

To decrease U.S. dollar-based transactions, the central bank of India is pressuring regional banks to persuade their customers to settle commerce between the United Arab Emirates and India using the dirham (AED) or Indian rupee (INR), according to five people who spoke to Reuters.

According to three banking sources, the action is a part of the Reserve Bank of India’s larger strategy to encourage settlement in local currencies with nations with whom India has a trade deficit, with the secondary benefit of expanding the reach of the rupee internationally.

According to official figures, India’s trade deficit with the UAE in 2022–23 was $21.62 billion, or 8.2% of its overall deficit. The two nations decided to ease commerce in rupees rather than dollars in July.

According to a government source, the goal was to lessen the amount of money leaving the country because of the trade imbalance.

A treasury executive from a private bank said that “the RBI has asked banks to encourage clients and corporates to gradually initiate INR-AED trades, instead of using the dollar.”

At a seminar this month, an RBI official told foreign currency traders this message orally, according to four sources. This correspondence has never before been made public.

Due to their lack of authorization to talk to the media, none of the sources wanted their names to be used. An email from Reuters requesting comment was not answered by the RBI or the ministry of commerce.

According to the government source, the RBI may think about establishing internal goals for the amount of commerce between India and the UAE that should be conducted in alternatives to dollars.

The central bank “has assured the market that they will be ready to support banks with INR-AED trades” and is “keen that volumes of such trades go up,” according to one banker.

At least three bankers said that the present volume is modest and may make it difficult for corporations to pay for the full import in dirhams, despite the fact that data on such cross-currency trading volumes is not publicly accessible.

In fact, Indian Oil Corp. paid Abu Dhabi National Oil Co. (ADNOC) earlier this month in rupees to purchase a million barrels of oil.

As a result of their more better financial sheets, major customers and corporations are being urged by the RBI to begin INR-AED trading, according to another banker.

However, a banker with a state-run business said that huge corporations have so far been hesitant to engage in non-dollar agreements.

Bankers, on the other hand, have pushed for such transactions with smaller businesses by providing lower service costs as an incentive, the banker added.

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