India and UAE make history with rupee-priced oil deal, shaping the future of global trade

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A refinery run by the Indian Oil Corporation in Haldia, West Bengal. In the financial year 2022-23, India spent $157.5 billion on importing 232.7 million tonnes of crude oil. — AFP

NEW DELHI, Dec 27: In a groundbreaking development, India, the UAE’s second-largest trading partner, has initiated its inaugural payment in rupees for the purchase of crude oil from the Emirates. This move signals a potential shift in global trade transactions away from the traditional dollar-denominated model, providing a significant boost to the burgeoning two-way trade between the nations, expected to surpass the $100 billion mark in the coming years.

Businesses and traders on both sides have enthusiastically welcomed this milestone, recognizing it as a crucial element of bilateral cooperation. This development not only fosters strengthened economic collaboration but also simplifies international financial interactions.

The momentum in UAE-India trade gained impetus with the signing of the Comprehensive Economic Partnership Agreement (Cepa) in 2022, propelling the trade volume to $85 billion that year. The UAE now stands as India’s third-largest trading partner and second-largest export destination in FY2022-23, while India holds the position of the UAE’s second-largest trading partner.

For India, the world’s third-largest energy consumer, the usage of the rupee for payment marks a historic stride in its strategic endeavor to reduce dependence on the dominant dollar and promote its currency globally. This aligns with the broader strategy of BRICS, where India is a key participant, aiming to replace the dollar as the world’s reserve currency. Experts in the oil industry view the adoption of rupee settlements as part of India’s comprehensive efforts to diversify its oil suppliers, lower transaction costs, and establish the local currency as a viable medium for trade settlements in the global arena.

Experts in currency note that conducting trade settlements in rupees eliminates the necessity for converting into another currency before handling payments for imports or exports. This not only contributes to the conservation of foreign exchange reserves but also holds the potential to reduce borrowing costs for India. The internationalization of the Indian rupee is seen as a step towards establishing it as an accepted means of payment for settling international trades. As the rupee gains popularity in global trade transactions, there is a possibility that it may evolve into a hard currency comparable to the US dollar.

This initiative aligns with the Reserve Bank of India’s (RBI) decision on July 11, 2022, allowing importers to pay in rupees and exporters to receive payments in the local currency. Subsequently, India has taken proactive measures to enhance the role of the rupee in cross-border payments, granting authorization to more than a dozen banks to settle trades in rupees with 18 countries. Furthermore, India has been actively encouraging major oil exporters such as Saudi Arabia and Russia to accept its currency for trade settlements.

The visit of Prime Minister Narendra Modi to the UAE in July this year led to significant developments, as the Central Bank of the UAE and the RBI signed two memoranda of understanding (MoUs). The first MoU established a framework to promote the use of local currencies for cross-border transactions, while the second focused on interlinking payment systems. Following the agreement with the UAE for rupee settlements, the Indian Oil Corporation executed payments in Indian rupees for the purchase of one million barrels of crude oil from the Abu Dhabi National Oil Company. Additionally, some Russian oil imports have also been settled in rupees.

India’s Minister of Commerce and Industry, Piyush Goyal, expressed the shared goal of both nations to elevate bilateral trade to reach $100 billion. Speaking at the 11th Meeting of the UAE-India High-Level Joint Task Force in Abu Dhabi, where various Memoranda of Understanding (MoUs) were signed across different sectors, Goyal anticipated a substantial influx of investments in both public markets and the manufacturing and services sector in the coming days. He went on to emphasize the limitless potential, stating, “even the moon is not the limit.”

In the financial year 2022-23 (April 2022 to March 2023), India allocated $157.5 billion for the import of 232.7 million tonnes of crude oil. Key suppliers in this endeavor included Iraq, Saudi Arabia, Russia, and the UAE, with the Middle East contributing to 58 percent of the overall supplies. Notably, India’s domestic supply fulfilled less than 15 percent of the country’s total demand.

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