A world beyond the dollar: What the rupee-dirham trade pact means for India.

The Reserve Bank of India (RBI) and the Central Bank of UAE have decided to transition towards a world without the dollar. In a bid to strengthen the economy of these two countries, they are now allowing importers and exporters to invoice and pay in their domestic currencies.

In exchange for the regular payments for goods being in American dollars, these two countries have made a pact to pay in rupee and dirhams, to build on an economic collaboration.

The transition was first mentioned in 2022, however it has only been actioned as of now, due to the ongoing conflict in which Russia has on the world.

The de-dollarization comes due to the Ukraine-Russia conflict and the need for looking at other payment methods for businesses and organizations in alternative countries. 

The news came during Prime Minister Narendra Modi’s visit to Abu Dhabi in July, where the goal was to create an easy path for business trades between India and the UAE.

Coming as a sure need in the current economy due to preventions in transportation from India and surrounding countries, the welcome of the rupee payments will potentially lessen the strain on the economy.

This strain will be lessened due to the lowering of transaction and fees, and ease in converting currency for smaller traders. 

This new step for India will also contribute to the increasing trend of investors that are having to look down the potential of bitcoin due to the loss of funds in transactions and costs.

Bitcoin roulette games are still a growing trend amongst India and surrounding areas, however there are less risks and need for this now, due to the rupee being regarded as a transactional currency for bilateral trade. 

Why now? 

Besides creating a payment mechanism needed for the economy to survive, the transaction costs in which India will now incur are slashed due to the dollar conversions being unnecessary.

The bilateral trade between India and the UAE alone in the years 2022-2023 were almost hitting $84.5 billion, which means a hefty amount of this was being lost in conversions for the traders. 

The first deal with the UAE is in relation to the exportation between the two countries, as the slowing global trade is at an all-time high. India made its first rupee payment to the UAE for the purchase of Oil under the trading name of Abu Dhabi National Oil Co. 

Oil is the largest imported necessity from these countries, and India and the UAE have mutually decided to try and raise the trade to $100 billion 2030. 

India is seeking more trades in local currency 

With the Indian rupee staying strong amongst the U.S. foreign exchange markets, this shows that the rupee is stable enough to stand on its own.

Creating a unique opportunity for India, they are now positively looking at a financial rise and a safeguard on their economy. With this in mind, India seeks to put the local currency at the forefront of their deals and create a stamp in the global markets BRICS tender. 

What is BRICS tender? 

BRICS is an acronym for the countries Brazil, Russia, India, China, and South Africa, where they will be holding a summit to discuss international trade and the challenge against the U.S. Dollar.

Though India stands with fighting against the dollar, they are the only country in the alliance who are not interested in a plan to launch a new currency. This is due to the positivity and growth in their own rupee, and where they can see it push within their economy. 

The step against the U.S. dollar has both positives and negatives and given that the US dollar has been the base currency for all international transactions since the 1940s it is a huge step to make.

Along with this, they hold 60% of the global central bank’s foreign exchange, and they are all held in the dollar.

The reason India is not scared to pull their rupees, is because although it was weakened against the dollar in 2022, it had strengthened immensely against other major currencies.

This alone segments the fact that the rupee is not falling, and their economy could be on the rise; but they need to act fast. 

Most developing countries, particularly Sri Lanka are experiencing severe financial crises and elevated debt issues, however India is at an all-time high. With a prediction that India’s economy is set to surpass that of the U.S. by 2075, it means they will stand as the second-largest economy at that time. 

India’s move towards the rupee currency deals, along with their exceedingly expansive growth in innovation and technology means that their steppingstone towards a strong infrastructure and economy is at an all-time high for this growing country.

Currently standing as the fifth biggest economy in the world, with a GDP of $3.74 billion, they still have a way to go, but it is all on the right track.