The next big step after CEPA: Local Currency Settlement
Dr Nilay Ranjan Singh
A common man - CEO at SBI, DIFC, Dubai, Author, Leadership and Management Coach, Trainer, Painter, Writer, Sculptor, Columnist, Satirist, Dramatist, Educationist, Researcher, volunteer for human causes
Article- Part 1 (3 parts series) by - Dr. Nilay Ranjan Singh
Its high time to focus on Rupee-Dirham deal
India and the UAE have long enjoyed a close and robust trade relationship. Indian expatriates in the UAE contribute significantly to its economy and play a major role in boosting India’s economy through remittances, forming one of the largest remitting diasporas. The two nations’ ties span cultural and economic spheres and have grown stronger in recent years. The UAE’s first-ever Comprehensive Economic Partnership Agreement (CEPA) was signed with India, highlighting the importance of their trade relations. Another milestone came last year when both countries agreed to conduct bilateral trade in their local currencies, leading to the creation of the rupee-dirham settlement mechanism.
What is the UAE Rupee agreement- INR/AED deal?
In July 2023, India and UAE formalized an agreement to settle transactions between the two countries in the respective currencies of Rupee and Dirham. This direct trade in local currencies was not only aimed at expanding bilateral trade to $100 billion under their free trade pact (CEPA) but also meant to develop a mechanism and ecosystem of directly dealing in two currencies as a natural progression just like some of the important currencies in the world, e.g. USD, Euro, etc. The ultimate aim is to develop a market wherein direct bidding can be done in two currencies, i.e., the INR/AED quote could be provided as is being done till now for INR/USD. AED being pegged with USD, theoretically, it doesn’t need a quote for AED/USD like INR/USD. Though the agreement was signed in July 2023, it was contemplated since the latter half of 2022.
Initially, it was presumed that India and the UAE might start by settling only about a quarter of bilateral trade in local currencies, covering the non-oil trade with a few banks on each side and scaling it further. It was presumed to cover around 20-25% of trade in local currency initially. The trade deficit in non-oil trade between India being less compared to the oil trade was one factor to consider. However, the first deal that happened in INR-AED was an oil deal. This gives us reason to ponder that the plan and execution don’t always go as envisaged and also gives us a reason to understand the impediments in making this deal successful. India has a trade deficit with the UAE from 2019-20, as India buys now more oil from here. Indian crude oil imports represent a significant amount and deplete foreign exchange. India is the world’s third-largest commodity importer, and payments for oil imports happen majorly in the US dollar, which fluctuates a lot, especially in recent years, when it has appreciated against most currencies.
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Mechanism
The transaction mechanism is simple, wherein the exporter from UAE is expected to get payment in INR for the export made to India, credited to its account maintained with a bank operating in India (as permitted by the central bank) through the Special Vostro Rupee Account (SVRA) of their banker in UAE. The Vostro account means ‘your account with us’ i.e., UAE banks in INR in India are Vostro accounts. However, since this account is being opened for a special purpose, it is called a ‘Special Rupee Vostro Account’.
Similarly, Indian exporters are expected to receive the export proceeds in AED in their Dirham account opened by a UAE bank.
Thus, the invoices will have to be in the respective local currencies. For example, exports to India will be invoiced in INR, and exports to the UAE in AED.
Progress
The first deal involved the Indian Oil Corporation (IOC) making payments in Indian rupees to purchase one million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC). As reported in the media, some Russian oil imports have also been settled in rupees (Reuters). There have also been some deals in Gold, jewellery, the food sector, and mobile purchases from India. Still, very little data is in the public domain to ascertain the level of trade settled in bilateral currencies.
One important factor, though, has been the lack of active private sector participation, which restricts its appeal in popularizing the Rupee-Dirham settlement. However, it is expected to pick up in 2024-25.