India’s recent historic move to make its first-ever payment in rupees for crude oil purchased from the UAE is poised to trigger a paradigm shift in global trade transactions, potentially moving away from the dominance of the US dollar.

This significant development is expected to play a pivotal role in fostering a booming two-way trade between India and the UAE, already the second-largest trading partner for the latter, with bilateral trade on track to surpass the $100 billion mark in the coming years.

The momentous payment in local currency is a strategic move by India, the world’s third-largest energy consumer, to reduce its dependence on the dollar and promote the global use of the Indian rupee.

This aligns with the broader strategy of the BRICS nations, of which India is a key member, to challenge the supremacy of the greenback as the world’s reserve currency.

Industry experts in the oil sector highlight that settling trade transactions in the rupee is part of India’s broader efforts to diversify its oil suppliers, streamline transaction costs, and position the rupee as a credible currency for international trade settlements.

Eliminating the need for currency conversion before settling trade transactions, a rupee-based payment system is expected to help India save on foreign exchange reserves.

Currency experts argue that the internationalization of the Indian rupee may eventually lead to a reduction in India’s borrowing costs, making the rupee a widely accepted mode of payment for international trade.

If successful, the rupee could even evolve into a hard currency comparable to the US dollar.

The initiative to make payments in rupees is also in line with the Reserve Bank of India’s (RBI) measures, announced on July 11, 2022, allowing importers to pay in rupees and exporters to receive payments in the local currency.

Subsequently, India has taken proactive steps to enhance the role of the rupee in cross-border payments, authorizing more than a dozen banks to settle trades in rupees with 18 countries.

India has also extended efforts to persuade other major oil exporters, including Saudi Arabia and Russia, to consider its currency for trade settlements.

The culmination of these efforts was evident during Prime Minister Narendra Modi’s visit to the UAE in July, where the Central Bank of the UAE and the RBI signed two crucial memoranda of understanding (MoUs).

One MoU established a framework to promote the use of local currencies for cross-border transactions, while the other focused on interlinking payment systems.

Following these agreements, the Indian Oil Corporation made historic payments for the purchase of one million barrels of crude oil from the Abu Dhabi National Oil Company, and some Russian oil imports were also settled in rupees.

India’s Commerce and Industry Minister, Piyush Goyal, expressed optimism about expanding bilateral trade between the two nations to reach $100 billion.

During the 11th Meeting of the UAE-India High-Level Joint Task Force in Abu Dhabi, where several MoUs were signed across different sectors, Goyal emphasized the anticipation of substantial investments in public markets and the manufacturing and services sectors.

He confidently stated that the ambition for trade expansion between the two nations knows no bounds.

In the financial year 2022-23, India’s expenditure on importing crude oil amounted to $157.5 billion, with key suppliers including Iraq, Saudi Arabia, Russia, and the UAE.

The Middle East contributed a significant 58% of all oil supplies, emphasizing India’s reliance on the region for its energy needs, as domestic supply met less than 15% of the country’s demand.

As India takes bold steps to reshape the dynamics of global trade transactions, the move towards rupee-based payments for oil imports not only strengthens economic ties with the UAE but also positions the Indian rupee on the international stage as a currency of growing significance.

The success of this initiative could have far-reaching implications for the future landscape of global trade and finance.

Last Updated: 27 December 2023