RBI's Drive: Promoting Local Currency Trade with UAE

The Reserve Bank of India (RBI) is reportedly encouraging banks to promote trade settlement between India and the UAE using local currency, signaling a strategic move to reduce the outflow of dollars and provide benefits to traders.

Amidst a substantial bilateral trade volume and a significant number of Indian workers in the UAE, the RBI's initiative seeks to address the issue of dollars leaving India. In the fiscal year 2022-2023, India recorded a trade deficit of $21.62 billion with the UAE, prompting the consideration of local currency trade as an effective strategy.

Trading in the local currency offers cost advantages over using third currencies like the dollar. This move can potentially strengthen the value of the Indian rupee and contribute to currency stability. By promoting local currency trade, the RBI envisions positive implications for India's trade balance.

While reports indicate the RBI's push for local currency trade, banking sources clarify that the RBI employs a range of strategies to effectively implement policies without necessarily enforcing them. The move aligns with efforts to boost economic ties between India and the UAE, aiming for trade between the two countries to reach $100 billion over the next five years.

India's trade with the UAE has been robust, despite global trade downturns. In March 2023, trade between India and the UAE witnessed a significant year-on-year rise of 16%, reaching over $84 billion. This growth reflects the bilateral commitment to trade expansion and economic partnership.

In conclusion, the RBI's encouragement of local currency trade with the UAE is a strategic step to bolster economic ties, reduce dollar outflows, and provide cost advantages for traders. While aiming for positive trade implications and currency stability, the RBI employs various strategies without enforcing them, contributing to the broader goals of strengthening India's economic relationships.