👍👍👍👍👍👍👍‘De-dollarisation’ pact with UAE, a good step

https://www.thehindubusinessline.com/opinion/editorial/de-dollarisation-pact-with-uae-a-good-step/article67102013.ece

The Russia-Ukraine war and the resulting disruption in international trade settlement seem to have prodded the Centre to reduce dependence on the US dollar and establish alternative channels for current and capital account settlement. While the rupee settlement of trade with Russia may have hit a wall, it is good that the Centre is continuing to explore cross-border settlements in local currencies with other countries.

The recent agreements signed with UAE to establish a framework for settlement of cross-border transactions in local currencies and to inter-link the payment and messaging systems of the two countries, are especially significant given the prominence of UAE in India’s trade and capital flows

The agreement with UAE could be a milestone in this journey since the country is a prominent trading partner of India, ranking as the second highest destination for Indian exports.

 Trade between the two countries stood at $84.5 billion in FY23. 

Besides this, UAE is also an important source of capital flows into India in the form of FDI, FPI as well as inward remittances from NRIs. If the settlement of these transactions moves away from dollar, it will greatly reduce the pressure on our external account and rupee. The inter-linking of the payment systems will ease the money transfers between the two countries besides reducing the cost of these transfers.  

RBI has given its approval to banks from 18 countries to open such special vostro rupee accounts, including Germany, Mauritius, Singapore, Sri Lanka and United Kingdom.

It could, however, take time before cross-border transactions between India and UAE shift to local currencies in a big way. This facility will be made available alongside the regular settlement in US dollar. It will be left to the discretion of the entities involved in the cross-border transaction to use this facility. But the resolve to gradually increase the proportion of rupee’s usage in global transaction is heartening.

Though the US dollar dominates global forex turnover with around 90 per cent share, emerging market currencies such as the yuan and the rupee have been slowly increasing their share over the last two decades; yuan currently accounts for 7 per cent and the rupee 2 per cent. There is already a shift away from other hard currencies such as the Euro and Japanese Yen. This could happen with the dollar, too.