India and UAE begin energy trade in local currencies

India and the United Arab Emirates have started settling energy trade in rupees and dirhams under the so-called Local Currency Settlement (LCS), with the first such transaction taking place on Monday for the purchase of oil. 

According to a statement issued by India’s embassy in the UAE, Indian Oil Corporation made a payment in rupees to Abu Dhabi National Oil Company (ADNOC) to buy a million barrels of crude from the Middle Eastern nation. The transaction follows one made in July, involving the sale of 25kg of gold from a UAE exporter to a buyer in India for about 128 million rupees ($1.5 million).

The LCS mechanism is part of the historic memorandum of understanding, which was signed on July 15 during Indian Prime Minister Narendra Modi’s one-day visit to the UAE. The sides then also agreed to link their instant payment systems.

The LCS is expected to reduce transaction costs by eliminating dollar conversions and increasing reliance on local currencies. Traders can choose the payment currency based on mutual agreement.

India-UAE trade hit $85 billion in 2022, making the Arab nation India’s third-largest trading partner for 2022-23 and India’s second-largest export destination. India is the UAE’s second-largest trading partner.

The India-UAE oil transaction comes at a time of a growing trend towards global de-dollarization. New Delhi has been actively moving towards making the Indian rupee a strong international currency that could potentially be used as an alternative to the US dollar for settling international trade. A recent report of the working group of the Reserve Bank of India stated that the rupee has the potential to become an internationalized currency, as India is one of the fastest growing countries and “has shown remarkable resilience even in the face of major headwinds.”