EXCLUSIVE: India cenbank pushes banks to liquidate UAE trades in rupees, dirham: sources

MUMBAI/NEW DELHI, Aug 21 (Reuters) – India’s central bank is pressuring local banks to ask their customers to settle trade between the United Arab Emirates and India using the dirham (AED) or rupee. india (INR) to reduce the value of the US dollar. transactions based on transactions, five sources told Reuters.

The move is part of the Reserve Bank of India’s broader objective of promoting local currency settlement with countries with which India runs a trade deficit, with the side effect of boost the global reach of the rupee, three bank sources said.

India’s trade deficit with the United Arab Emirates was $21.62 billion in 2022/23, or 8.2% of its total deficit, government data shows. In July, the two countries agreed to facilitate trading in rupees instead of dollars.

The idea, said a government source, was to reduce the outflow of dollars due to this trade deficit.

“The RBI has asked banks to encourage clients and businesses to start INR-AED transactions gradually, rather than using the dollar,” said a private bank treasury official.

An RBI official delivered this message verbally to currency traders at a seminar this month, four sources said. This communication has not been previously reported.

None of the sources wanted to be named because they are not authorized to speak to the media. The RBI and the commerce ministry did not respond to an email from Reuters seeking comment.

The RBI may consider setting internal targets for the amount of India-UAE trade it would like to see move away from dollars, the government source said.

The central bank is “interested in seeing the volumes of such operations increase” and “has assured the market that they will be ready to support banks with INR-AED operations,” said this banker.

While data on such cross-currency trading volumes is not publicly available, at least three bankers said the current volume is low and may act as a barrier to companies paying for full imports in dirhams.

In fact, earlier this month, Indian Oil Corp. (COI.NS) paid Abu Dhabi National Oil Co (ADNOC) in rupees to buy one million barrels of oil.

“The RBI is telling banks to encourage large clients and companies to start INR-AED operations first because their balance sheets are relatively stronger,” said another banker.

But big corporations have, until now, been reluctant to participate in deals that are not denominated in dollars, said a banker at a state-owned company.

In the case of smaller businesses, on the other hand, bankers have encouraged these types of transactions by offering discounted service fees as an incentive, the banker said.

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