A growing share of India-UAE trade bypasses the USD

More than 15% of bilateral trade between India and the UAE has successfully bypassed the USD and is invoiced in local currencies since the launch of the INR-AED settlement mechanism in July 2023, India’s Ambassador to the UAE Deepak Mittal told the Economic Times.

Focus on easing trade friction: The two nations are ramping up efforts to expand adoption of the system by onboarding more banks, simplifying procedures, and reducing paperwork for businesses engaged in cross-border trade — while authorities work with commercial banks and industry stakeholders to standardize processes and widen participation.

To what end? While the system was introduced to cut reliance on the USD, the primary objective is said to be lower transaction costs and improved trade efficiency rather than de-dollarization.

Why it matters: The UAE is India’s third-largest trading partner, with bilateral trade exceeding USD 100 bn in each of the past two years. A lion’s share of transactions are still denominated in AED rather than INR, industry sources told the daily. Businesses have cited procedural delays and duplicate documentation as key hurdles — adoption is strictly confined to state-backed oil and precious metals transactions. Depreciation risk also remains a deterrent, particularly for commodity exporters with thin margins.

IN CONTEXT- We previously broke down how economics might decide whether the INR becomes internationally accepted. Local-currency trade is feasible only when counterparties trust the currency as a medium of exchange.