PayPal Payment Gateway: India Expands Local Currency Settlement to Reduce Dependence on the US Dollar

Recently, the Reserve Bank of India has approached banks doing business with the United Arab Emirates (UAE) to advocate direct settlement of some trade payments in Indian rupees and UAE dirhams. At the same time, talks have been revived with the Central Bank of Russia to expand the local currency settlement mechanism. In the current international scenario, India is gradually reducing its dependence on the United States dollar.

The UAE is India's third-largest trading partner with a trade volume of over $80 billion in 2023, according to the United Nations Commodity Trade Statistics Database (Comtrade). The UAE mainly exports crude oil to India, while India exports refined chemicals and electrical goods to the UAE. In addition, a large number of Indian professionals and labourers work in the UAE and repatriate large amounts of money to India every year. A direct settlement mechanism between the rupee and the dirham could potentially mitigate the losses incurred by these individuals due to exchange rate fluctuations.

Back in July 2023, India and the UAE agreed to establish a framework for local currency settlement of cross-border trade and develop an alternative settlement system to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Since then, the Reserve Bank of India (RBI) has allowed UAE banks to open special rupee accounts in Indian banks for trade settlement and encouraged importers and exporters to transact directly in rupees and dirhams. Recently, the Reserve Bank of India directed Indian banks operating in the UAE to obtain matching dirham funds from other banks before making payments to the UAE, bypassing the conversion of Indian rupees into US dollars and then into dirhams in the international foreign exchange market. This process is still in its infancy and the Reserve Bank of India has not set any mandatory targets for the UAE, but is encouraging the accelerated development of the rupee-dirham foreign exchange market.

Industry insiders believe that local currency settlement between the two countries may facilitate the development of the rupee-dirham foreign exchange market and create new opportunities for India's financial sector. Moreover, if the rupee-dirham settlement mechanism is perfected, it could set a precedent for bilateral local currency settlements between India and other countries, which would not only enhance the internationalisation of the rupee, but also help to further reduce the dependence on the US dollar.

In order to achieve this, India has not only focused on the rupee-dirham settlement mechanism, but has also restarted negotiations with the Central Bank of Russia to expand the local currency settlement mechanism aimed at resolving the payment problems associated with the surge in bilateral trade in recent years. The central banks of Russia and India have agreed on a base exchange rate that provides a mechanism for facilitating transactions between the rupee and the ruble and helps in the settlement of non-dollar currencies. If this mechanism is established, it will have a positive impact on trade between the two countries and help to overcome sanctions hurdles.

Reducing dependence on the United States dollar will ease the pressure on India's foreign exchange reserves in the short term and reduce losses due to exchange rate fluctuations. In the long run, it may enhance the convenience of bilateral trade with a number of countries, so that the rupee "to the world", in international trade for India to bring more benefits. However, this will not be easy. At present, India's international trade advantage is not outstanding, manufacturing industry lack of global competitiveness, and domestic demand is also insufficient, often leading to export bans. This has resulted in a low share of Indian goods in the global market. According to the World Trade Organisation, India's total exports and imports in 2023 will be around $1.1 trillion, ranking 14th globally and accounting for 2.31 TP3T of global trade.Therefore, analysts believe that the Indian rupee lacks sufficient support on the road to internationalisation and discussions with other countries on a local currency settlement mechanism with India need to be cautious. For India, the government needs to find ways to enhance the hardness and stability of the Indian rupee, giving confidence to countries like UAE and Russia to hold large amounts of Indian rupees.