In order to reduce the dollar dependence India layout of local currency settlement The country has become a new target: India four-way payment how to make money

The Reserve Bank of India recently directed banks doing business with the UAE to settle a portion of trade payments directly in Indian rupees and UAE dirhams. Meanwhile, various media outlets in Russia and India reported last week that the Central Banks of India and Russia have restarted talks to expand the local currency settlement mechanism. The move is seen as part of India's strategy to reduce its dependence on the US dollar.

Reserve Bank of India's new requirements for UAE payments

According to Reuters, the Reserve Bank of India is directing banks to obtain matching dirham funds from other banks before making payments to the UAE, thereby avoiding the need to convert Indian rupees into US dollars and then into dirhams in the international foreign exchange market. Reuters notes that this process is still in its infancy and the Reserve Bank of India has not yet set any mandatory targets. Instead, it continues to encourage the formation of a rupee-dirham foreign exchange market and requires banks to report regularly on the amount of such payments.

The UAE is India's third largest trading partner, with trade between the two countries totalling over $80 billion in 2023, according to the United Nations Commodity Trade Statistics Database. The UAE mainly exports crude oil to India, while India exports refined chemicals and electrical goods, among others, to the UAE. While the UAE has historically enjoyed a trade surplus with India, the Russia-UAE conflict in 2022 led to Russia replacing the UAE as India's main supplier of oil, narrowing the trade imbalance between the two countries.

However, there is still a huge demand for direct currency settlements between India and the UAE. The Times of India reports that a large number of Indian workers and professionals in the UAE repatriate large amounts of money to India every year. In addition, India's purchase of Russian oil through traders in the UAE involves settlement in local currency to circumvent potential sanctions.

In July 2023, following a visit to the UAE by Indian Prime Minister Narendra Modi, the two countries agreed to establish a framework for local currency settlement of cross-border trade and to develop a local currency settlement system as an alternative to the SWIFT payment system. Subsequently, the Reserve Bank of India (RBI) allowed UAE banks to open special rupee accounts in Indian banks for trade settlements and encouraged importers and exporters to transact directly in rupees and dirhams. The month marked the first time India traded crude oil with the UAE in rupees, although reports indicate that these transactions have not been ongoing.

According to India Today, local currency settlement could help develop the rupee-dirham foreign exchange market and provide new opportunities for India's financial sector. It may also set a precedent for bilateral local currency settlements with other countries, exploring the internationalisation of the rupee as well as reducing dependence on the US dollar.

In addition, the movement of funds settled in local currency is more easily monitored by the Reserve Bank of India. Encouraged by the Reserve Bank of India, some banks have begun to promote local currency settlement through measures such as discounted service fees, which has attracted a number of small and medium-sized dealers to switch systems. However, the lack of incentives for larger firms to switch has resulted in low transaction volumes at present.

India establishes new mechanism to bypass dollar with Russia

Recently, India has taken a number of steps to promote the internationalisation of the rupee.2024 In May, the Reserve Bank of India's annual report mentions that the bank has allowed banks to open rupee accounts and provide rupee loans to non-residents abroad. The Reserve Bank of India plans to further relax regulatory measures for non-resident rupee accounts in the future to promote FDI and foreign portfolio investment.

The Economic Times of India has reported that India and Russia are exploring the establishment of a benchmark exchange rate between the rupee and the rouble for direct trade using these currencies. The media also said that senior regulatory bodies and bankers in both countries are seeking to overcome the dollar-based trade barriers imposed on Moscow by the West.

India-Russia bilateral trade has surged in recent years, especially since the imposition of sanctions on Moscow by the West following the 2022 conflict in Ukraine. India has become the second largest buyer of Russian crude oil after China.

According to India's Ministry of External Affairs, since 2021, India's imports of Russian goods under the "Strategic Crude Procurement" policy have increased by about 83,001 TP3T, while India's exports to Russia have increased by 591 TP3T.

However, payments for oil and other large imports require the services of large Russian banks. The Economic Times of India quoted a bank official as saying that "a market and exchange rate for transactions between the rupee and the ruble, as well as a financial settlement system that could be an alternative to SWIFT" were crucial in this context.

The reference exchange rate between the rupee and the loonie is likely to be set by the Reserve Bank of India and the Central Bank of Russia with revised terms to match the underlying market realities, a senior banker told the media.

The Economic Times of India added that bank officials would also discuss how to make wider use of rupee balances in special accounts opened by Russian banks with Indian banks. The rupee balance is so high because Russian exports to India paid in rupees exceed Indian exports to Russia.

Bloomberg reports that Russian rupee deposits in Indian banks run into billions of dollars.

Source: Zhejiang Trade Promotion compiled from Global Times, China Economic Net and Reference News.