India and UAE Make Landmark Move to Settle Crude Oil Transactions in National Currencies

India and UAE Make Landmark Move to Settle Crude Oil Transactions in National Currencies

Ira Singh
17 Aug’23

In a significant development for the global oil trade, India and the United Arab Emirates (UAE) have announced a historic agreement to settle their crude oil transactions using their respective national currencies. This groundbreaking move marks a departure from the traditional practice of using the US dollar as the primary currency for oil transactions and carries substantial implications for both nations and the wider energy market.

The Indian rupee and the UAE dirham is being utilised in this landmark transaction, which is seen as a significant shift in international trade dynamics. India, UAE have successfully achieved a significant trade milestone by executing their first crude oil transaction using the Local Currency Settlement (LCS) mechanism on August 14, 2023,according to recent updates.

This comes as a result of the Memorandum of Understanding (MoU) signed during Prime Minister Narendra Modi’s visit to the UAE on July 15.The MoU introduces the Local Currency Settlement (LCS) System, facilitated by the Reserve Bank of India and the Central Bank of the United Arab Emirates. It paves the way for cross-border transactions using the rupee and dirham.

The first transactions between the two countries using national currencies involved a sale of 25 kilograms of gold from a prominent UAE gold exporter, invoiced at approximately Rs 128 million ($1.5 million), according to media reports.With gold, gems, and jewellery being among the most traded commodities between India and the UAE, the successful execution of such a transaction serves as a testament to the viability of this mechanism. Last year, the two-way trade between India and UAE was worth US$ 20 billion, which was about 42 per cent of the total non-oil trade between the two countries.

One of the key benefits of this pioneering LCS system is the reduction in transaction time and costs. By eliminating the need for intermediary currencies, both countries can expect to save on foreign exchange expenses, leading to enhanced economic cooperation. Additionally, reliance on national currencies is anticipated to bolster economic resilience and strengthen bilateral relations. Moreover, any surplus balances in the local currencies can be invested in various local assets, including corporate bonds, government securities, and equity markets.