Why the India-UAE deal to trade in local currencies matters


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With India and the UAE starting to settle bilateral trade in their respective currencies, the move is set to further strengthen economic relations between the two countries and could provide a significant boost to exports from Asia's third-largest economy, analysts say.

Last month, India signed an agreement with the UAE to allow it to settle trade in rupees instead of US dollars — which is widely used for India's trade settlements.

This move aims to lower transaction costs by cutting expenses that accompany payments made in foreign currencies and the uncertainty created for businesses by fluctuating exchange rates.

The Indian rupee hit a historic closing low of of more than 83 against the US dollar two weeks ago.

Foreign exchange costs present a significant expense for India in terms of its crude oil imports. The country is the world's third-largest importer of the commodity and it pays for oil imports in the US currency, which has fluctuated a lot in recent quarters.

“There are many benefits to such a development,” says Ratnadeep Roychowdhury, co-head, private equity and sovereign wealth funds, at Indian law firm Nishith Desai Associates.

“It protects the bilateral trade from geopolitical risks and currency fluctuations. It strengthens the trading relation and underlines each country’s commitment to the other. Moreover, it helps both countries to de-risk their dependence and exposure to the reserve currencies in use today.”

The pact will have a "major impact” as “the removal of hedging costs should make [India's] export pricing more competitive”, he adds.

India is the UAE's second-largest and the UAE is India's third-largest trading partner. Bilateral trade between the two countries increased by 16 per cent to $84.5 billion between April 2022 and March 2023 from $72.9 billion in the previous financial year, according to Indian government data.

However, India has a trade deficit with the UAE, which stood at $21.62 billion in the last financial year.

While India's major import from the UAE is oil, its exports to the country include jewellery, refined petroleum products, food, textiles, and machinery.

The first crude oil transaction under the local currency settlement (LCS) system took place this month between Abu Dhabi National Oil Company (Adnoc) and the Indian Oil Corporation, according to the Indian embassy in the UAE.

The transaction involved the sale of about a million barrels of crude oil, settled with Indian rupees and UAE dirhams, it said.

The new payment option “symbolises the deep-rooted trust and strategic partnership between India and the UAE”, says Swati Babel, a cross-border trade finance business specialist.

“Not only does it simplify the trade process, but it also elevates the prominence of both the Indian rupee and the UAE dirham in global trade. It’s a positive step towards a multipolar economic world, indicating a shift from the traditional dependencies on dominant reserve currencies.”

The two countries have also been striving to grow their trade ties with other steps.

In a major move aimed at expanding trade relations, last year saw the implementation of the India-UAE Comprehensive Economic Partnership Agreement.

The trade pact has helped to drive bilateral trade between India and the UAE to record highs during the last financial year, according to the Indian government.

The growth in exports to the UAE far outpaced India's overall rise in exports globally in this period.

Indian exports to the UAE increased by 11.8 per cent to $31.3 billion, compared to a growth of 5.3 per cent in India's total exports worldwide.

The move to use local currencies “is a step forward” in the goal of CEPA, which is to boost bilateral trade between the two countries to $100 billion within five years of its introduction, says Ms Babel.

“The mechanism can be employed in a variety of trade-related activities, ranging from buying and selling of goods and services to investments in both public and private sectors,” she says.

“For instance, Indian businesses importing oil from UAE or Emirati businesses procuring IT services from India can directly use their local currencies. Additionally, direct investments, infrastructural projects, and even tourism exchanges could see the application of this mechanism.”

With a direct currency exchange mechanism in place, this can make Indian commodities more competitive in the UAE market and attract more businesses to trade with the UAE, as transaction costs come down and exchange rate risks are minimised, says Ms Babel. In turn, this could help to increase export volumes.

She says it could also “be instrumental” in sectors including aviation, defence, and health care, and help to increase collaboration in several sectors.

“The move represents a significant departure from traditional trade practices,” says Akash Shukla, founder of the Uprise India Initiative, which promotes entrepreneurship.

“It fosters bilateral ties, minimises currency risk, cuts costs, and demonstrates confidence in the stability of local currencies.”

India and the UAE have a long history of economic ties, and “this collaboration extends beyond trade”, says Pushpank Kaushik, chief executive of Jassper Shipping, a logistics company in India.

“It involves areas like energy and economic diplomacy. The shift signifies a strategic step in elevating economic ties, promising a more integrated and prosperous economic partnership between India and the UAE.”

“This agreement is broadening trade between nations and improving the import-export logistics and shipping sector by facilitating smoother transactions, investments, and straightforward financial planning,” he adds.

Lal Bhatia, chairman of Hilshaw Group and chairperson and director of think tank UAE STRAT: 2071, says the significance of the development cannot be underestimated.

“The decision of India and the UAE to settle bilateral trade in their own currencies signifies a landmark shift in the dynamics of international trade,” says Mr Bhatia.

“This move, fuelled by aspirations for economic autonomy and financial stability, has the potential to deepen their economic engagement, catalyse investments and strengthen ties between the two nations.”

The move is significant not only for the bilateral relationship but also has "broader implications for the global financial landscape”, he adds.

“It demonstrates the evolving capabilities of emerging economies to harness their strengths and collaboratively design mechanisms that serve their collective interests,” says Mr Bhatia.

While experts agree that the move is highly positive, they also note that it is not without its challenges.

“There's the task of creating the essential financial infrastructure to facilitate dirham and rupee settlements,” says Edul Patel, chief executive and co-founder of Mudrex, a cryptocurrency investment platform.

“This might entail substantial investments in technology and systems, with a particular emphasis on establishing secure and streamlined payment channels.

Secondly, it's vital to emphasise the importance of raising awareness and educating businesses about the advantages and possible obstacles associated with conducting transactions in these currencies. This educational effort will play a pivotal role in encouraging widespread adoption.”

While there should be more stability for Indian exporters, they could miss out on certain benefits that do come from dollar fluctuations, analysts say.

“Export volumes are likely to see a marginal improvement from [the agreement], as it reduces one level of currency risk when it comes to settling,” says Utkarsh Sinha, managing director of Bexley Advisors, a boutique investment bank based in Mumbai.

“However, it also means that Indian exporters will lose the value gain they would normally experience when the Indian rupee depreciates against the US dollar in export transactions.”

“The move is especially significant because of the current geopolitical environment,” Samir Somaiya, president of the IMC Chamber of Commerce and Industry, says.

“The impact of settling bilateral trade with the UAE in local currencies on India's exports can be substantial,” he adds.

But it still remains to be seen how widely the option will be used.

“The speed and scale of the same will depend on factors, including the scale of adoption and ease of implementation,” says Mr Somaiya.

“But smaller Indian companies will more easily be able to do business since it will reduce the complexities of currency risk.”

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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Ferrari 12Cilindri specs

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Power: 819hp

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Company profile

Name: Tratok Portal

Founded: 2017

Based: UAE

Sector: Travel & tourism

Size: 36 employees

Funding: Privately funded

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The bio

Studied up to grade 12 in Vatanappally, a village in India’s southern Thrissur district

Was a middle distance state athletics champion in school

Enjoys driving to Fujairah and Ras Al Khaimah with family

His dream is to continue working as a social worker and help people

Has seven diaries in which he has jotted down notes about his work and money he earned

Keeps the diaries in his car to remember his journey in the Emirates

The years Ramadan fell in May

1987

1954

1921

1888

The biog

Favourite food: Tabbouleh, greek salad and sushi

Favourite TV show: That 70s Show

Favourite animal: Ferrets, they are smart, sensitive, playful and loving

Favourite holiday destination: Seychelles, my resolution for 2020 is to visit as many spiritual retreats and animal shelters across the world as I can

Name of first pet: Eddy, a Persian cat that showed up at our home

Favourite dog breed: I love them all - if I had to pick Yorkshire terrier for small dogs and St Bernard's for big

The specs

Engine: 3.8-litre, twin-turbo V8

Transmission: eight-speed automatic

Power: 582bhp

Torque: 730Nm

Price: Dh649,000

On sale: now  

Juventus v Napoli, Sunday, 10.45pm (UAE)

Match on Bein Sports

'Cheb%20Khaled'
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COMPANY PROFILE
Name: Airev
Started: September 2023
Founder: Muhammad Khalid
Based: Abu Dhabi
Sector: Generative AI
Initial investment: Undisclosed
Investment stage: Series A
Investors: Core42
Current number of staff: 47
 
Desert Warrior

Starring: Anthony Mackie, Aiysha Hart, Ben Kingsley

Director: Rupert Wyatt

Rating: 3/5

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%3Cp%3E%3Cstrong%3EDeveloper%3A%3C%2Fstrong%3E%20Respawn%20Entertainment%3Cbr%3E%3Cstrong%3EPublisher%3A%3C%2Fstrong%3E%20Electronic%20Arts%3Cbr%3E%3Cstrong%3EConsoles%3A%3C%2Fstrong%3E%20PC%2C%20Playstation%205%2C%20Xbox%20Series%20X%20and%20S%3Cbr%3E%3Cstrong%3ERating%3A%3C%2Fstrong%3E%204%2F5%3C%2Fp%3E%0A
UAE squad to face Ireland

Ahmed Raza (captain), Chirag Suri (vice-captain), Rohan Mustafa, Mohammed Usman, Mohammed Boota, Zahoor Khan, Junaid Siddique, Waheed Ahmad, Zawar Farid, CP Rizwaan, Aryan Lakra, Karthik Meiyappan, Alishan Sharafu, Basil Hameed, Kashif Daud, Adithya Shetty, Vriitya Aravind

UAE Falcons

Carly Lewis (captain), Emily Fensome, Kelly Loy, Isabel Affley, Jessica Cronin, Jemma Eley, Jenna Guy, Kate Lewis, Megan Polley, Charlie Preston, Becki Quigley and Sophie Siffre. Deb Jones and Lucia Sdao – coach and assistant coach.

 
The National's picks

4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young

It Was Just an Accident

Director: Jafar Panahi

Stars: Vahid Mobasseri, Mariam Afshari, Ebrahim Azizi, Hadis Pakbaten, Majid Panahi, Mohamad Ali Elyasmehr

Rating: 4/5

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The specs: Lamborghini Aventador SVJ

Price, base: Dh1,731,672

Engine: 6.5-litre V12

Gearbox: Seven-speed automatic

Power: 770hp @ 8,500rpm

Torque: 720Nm @ 6,750rpm

Fuel economy: 19.6L / 100km

Key facilities
  • Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
  • Premier League-standard football pitch
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  • NBA-spec basketball court with auditorium
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  • An elevated football field that doubles as a helipad
  • Specialist robotics and science laboratories
  • AR and VR-enabled learning centres
  • Disruption Lab and Research Centre for developing entrepreneurial skills
COMPANY PROFILE
Name: Kumulus Water
 
Started: 2021
 
Founders: Iheb Triki and Mohamed Ali Abid
 
Based: Tunisia 
 
Sector: Water technology 
 
Number of staff: 22 
 
Investment raised: $4 million 
Profile

Name: Carzaty

Founders: Marwan Chaar and Hassan Jaffar

Launched: 2017

Employees: 22

Based: Dubai and Muscat

Sector: Automobile retail

Funding to date: $5.5 million

Dr Afridi's warning signs of digital addiction

Spending an excessive amount of time on the phone.

Neglecting personal, social, or academic responsibilities.

Losing interest in other activities or hobbies that were once enjoyed.

Having withdrawal symptoms like feeling anxious, restless, or upset when the technology is not available.

Experiencing sleep disturbances or changes in sleep patterns.

What are the guidelines?

Under 18 months: Avoid screen time altogether, except for video chatting with family.

Aged 18-24 months: If screens are introduced, it should be high-quality content watched with a caregiver to help the child understand what they are seeing.

Aged 2-5 years: Limit to one-hour per day of high-quality programming, with co-viewing whenever possible.

Aged 6-12 years: Set consistent limits on screen time to ensure it does not interfere with sleep, physical activity, or social interactions.

Teenagers: Encourage a balanced approach – screens should not replace sleep, exercise, or face-to-face socialisation.

Source: American Paediatric Association
The specs: Fenyr SuperSport

Price, base: Dh5.1 million

Engine: 3.8-litre twin-turbo flat-six

Transmission: Seven-speed automatic

Power: 800hp @ 7,100pm

Torque: 980Nm @ 4,000rpm

Fuel economy, combined: 13.5L / 100km

MATCH INFO

Uefa Champions League final:

Who: Real Madrid v Liverpool
Where: NSC Olimpiyskiy Stadium, Kiev, Ukraine
When: Saturday, May 26, 10.45pm (UAE)
TV: Match on BeIN Sports

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Updated: August 28, 2023, 1:01 PM