India and the United Arab Emirates have begun settling energy commerce in rupees and dirhams under the so-called Local Currency Settlement (LCS). The first such transaction—the purchase of oil—took place on Monday.
Indian Oil Corporation made a payment in rupees to Abu Dhabi National Oil Company (ADNOC) to purchase a million barrels of crude oil from the Middle Eastern country, according to a statement released by the Indian embassy in the UAE. The July deal involved the transfer of 25kg of gold for roughly 128 million rupees ($1.5 million) from an exporter in the UAE to a buyer in India.
The historic agreement of understanding, which was signed on July 15 during Indian Prime Minister Narendra Modi’s day-long visit to the UAE, includes the LCS mechanism. The parties then concurred to connect their systems for rapid payments.
Through the elimination of dollar exchanges and an increase in the use of local currencies, the LCS is anticipated to lower transaction costs. Based on mutual agreement, traders might decide on the payment currency.
UAE is India’s second-largest export market and its third-largest trading partner for the years 2022–2032, with trade between the two countries reaching $85 billion in 2022. The UAE’s second-largest trading partner is India.
The oil deal between India and the UAE takes place while the worldwide trend away from the dollar is intensifying. As a potential substitute for the US dollar in the settlement of international trade, New Delhi has been actively working to make the Indian rupee a strong international currency. The rupee has the potential to be an international currency, according to a recent assessment by the Reserve Bank of India’s working group, given that India is one of the nations with the fastest rates of economic growth and “has shown remarkable resilience even in the face of major headwinds.”
