2023-08-21 10:49:31
India’s central bank is urging local banks to ask their customers to settle trade between the UAE and India in dirhams (AED) or Indian rupees (INR) to reduce US dollar transactions, five said sources at Archyde.com.
The move is part of the Reserve Bank of India’s broader goal of promoting local currency settlements with countries with which India has a trade deficit, which will enhance the rupee’s global reach. , said three banking sources.
India’s trade deficit with the UAE was $21.62 billion in 2022/23, or 8.2% of its total deficit, according to government data. In July, the two countries agreed to facilitate trading in rupees rather than dollars.
The idea, according to a government source, was to reduce the outflow of dollars due to this trade deficit.
“The RBI has asked banks to encourage customers and businesses to gradually initiate INR-AED transactions, instead of using the dollar,” a private bank treasury official said.
An RBI official delivered the message orally to forex traders at a seminar this month, according to four sources. This communication had not previously been reported.
None of the sources wished to be named as they are not authorized to speak to the media. The RBI and the Department of Commerce did not respond to an email from Archyde.com seeking comment.
The RBI might consider setting internal targets regarding the volume of trade between India and the UAE that it would like to see move away from dollars, the government source said.
The central bank “is keen for the volumes of these transactions to increase” and “has assured the market that it will be ready to support banks for INR-AED transactions”, the banker said.
While data on these cross-currency trading volumes is not publicly available, at least three bankers have said the current volume is low and can be a barrier for businesses that want to pay for all of their imports in dirhams.
Indeed, earlier this month, Indian Oil Corp paid Abu Dhabi National Oil Co (ADNOC) in rupees to buy one million barrels of oil.
“The RBI is telling banks to first encourage large customers and corporates to start INR-AED transactions because their balance sheets are relatively stronger,” another banker said.
But big companies have so far been reluctant to engage in non-dollar-denominated transactions, a public company banker said.
With smaller companies, on the other hand, bankers have pushed for such transactions by offering reduced service fees as an incentive, the banker said.
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