India Pushes Rupee Settlements With Trade Partners Amid Dollar Shortages

New Delhi is boosting its efforts to expand the use of the Indian rupee (INR) in international trade, as it seeks to increase exports to nations facing a shortage of the U.S. dollar. The United Arab Emirates, a rising economy in the Middle East, is now set to join 18 other countries that are settling cross-border trade transactions with the rupee.

India's push to advance rupee transactions in global trade follows in the lines of similar efforts by other countries, notably China and Russia, to ditch the dollar as the world looks warily at the weaponization of the greenback by the United States. India and the UAE are working on signing an initial agreement on a rupee-dirham payment mechanism, according to Indian online media outlet FirstPost.

Officials from India's central bank, the Reserve Bank of India (RBI), and the Central Bank of the UAE announced on March 15 they signed a memorandum of understanding (MoU) to boost collaboration in financial services, especially exploring the interoperability between the central bank digital currencies (CBDCs) of the two countries. Previously, Indian and UAE banking officials held talks on a rupee-dirham payment system using banks.

An Indian official said the country has sizable trade with the Middle East and also receives remittances from the large number of Indian workers employed there. "It becomes much easier to transact in the local currency rather than going to a third-country currency like the U.S. dollar or Euro," the official, whose identity was not given, told FirstPost.

The UAE is currently India's third-largest trading partner, after the U.S. and China. In the first half of the ongoing financial year, bilateral trade between India and the UAE reached $44 billion, compared to a total of $73 billion worth of trade in FY2022. This bilateral trade is currently settled in the dollar.

Replacing the dollar has other advantages, in addition to de-risking nations that don't want to take sides in a world of great power competition from Washington's ire. It can, for example, encourage savings on foreign currency conversion fees and speed up forex flow. This is especially important for India's overseas workers, whose remittances play a large role in fueling the world's fastest-growing major economy, and Indian students abroad.

It also helps India expand trade with developing countries that are facing a rising debt burden and dollar shortages.

The current geopolitical dynamic and the obvious advantages of ditching the dollar have led to China and Russia already encouraging their trade partners to settle transactions in the yuan and the ruble. India has joined them in pitching the rupee as an "international currency" equivalent to the dollar among its trade partners.

Earlier in April, India's commerce secretary Sunil Barthwal announced measures to ease trade settlement in the rupee.

"If there are countries where there is any currency failure or they are having dollar shortages or international currency shortages, we are willing to trade in rupee with them, which will take not only our exports forward but also disaster-proof those countries," Barthwal said, following the release of India's foreign trade policy 2023.

India allowed invoicing and payments for international trade in the Indian rupees last year.

In March this year, the RBI authorized banks from 18 countries to open Special Vostro Rupee Accounts (SVRA) and use the Indian rupee for international transactions. This allows banks from countries including Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda and the U.K. to use Indian currency for transactions directly, without the need for conversion to another currency.

Santosh Sarangi, director-general of India's Directorate General of Foreign Trade, explained the move will help countries facing foreign currency issues, while encouraging higher transactions with India.

"Until now, banks of over 18 countries have opened special Vostro accounts and 30 Vostro accounts have been opened. Going forward, we expect a lot of transactions using these Vostro accounts," he said.

With effect from April 30, Indian expats in the UAE will also be able to use their local mobile numbers to access India's UPI-mobile-based payment apps such as PhonePe, Paytm, Google Pay and etc.. UPI, or Unified Payment Interface, is an instant payment system that enables instant financial transactions like money transfers and online payments through bank accounts.

The National Payments Corporation of India, which developed the UPI, said that non-resident Indians (NRIs) from 10 countries, including the UAE, with access to NRE/NRO [Non-Resident External account or Non-Resident Ordinary account] bank accounts and registered accounts with international mobile numbers will be able to make UPI transactions.

The UPI was linked to Singapore's similar PayNow system in February.

"Earlier, you were able to use only your NRI bank accounts and credit card details on your UPI apps. However, the new rules will allow expats to use their UAE mobile number or any other international numbers linked with NRE/NRO to register on any UPI app," Khushboo Garg, a Dubai-based banking expert, told International Business Times.

The news has been welcomed by people and businesses in both countries. Those traveling to either country now have to first buy dollars and then convert them to the local currency, losing heavily in exchange-rates and conversion fees.

"This is fantastic news for all Indians living in the UAE. We have consistently relied on the dollar or dirham for trade in the country. With the Indian rupee making its way to the airports and markets in the UAE, it will help us conduct business smoothly," Jay Prakash, a small business owner in Abu Dhabi, told International Business Times. "New business opportunities and foreign investment are certainly added advantages that we look forward to as small business owners."

India's rupee trade settlement mechanism is gaining significant interest from more countries. Tajikistan, Cuba, Luxembourg and Sudan, among others, are already in talks with India about using the mechanism for international transactions, Reuters reported.