India and the UAE are stepping up efforts to broaden adoption of the local currency settlement system for bilateral trade, aiming to reduce transaction costs and speed up trade facilitation, according to a report by the Economic Times. The push is focused on simplifying paperwork, onboarding more banks, and widening participation rather than pursuing de-dollarisation.
Current Adoption and Sectoral Concentration
More than 15% of bilateral trade between India and the UAE has been invoiced in local currencies between July 2023 and March 2026, according to Indian Ambassador to the UAE Deepak Mittal, as quoted by the Economic Times. However, industry executives indicate that adoption remains largely confined to transactions related to oil and precious metals. A larger share of invoicing still takes place in the UAE dirham rather than the Indian rupee, highlighting an imbalance in currency usage.
| Metric | Details |
|---|---|
| Bilateral trade invoiced in local currencies (Jul 2023–Mar 2026) | >15% |
| Dominant sectors for local currency settlement | Oil and precious metals |
| Primary invoicing currency | UAE dirham |
| Launch date of Local Currency Settlement System | July 2023 |
Mechanism: Special Rupee Vostro Account Framework
The India-UAE Local Currency Settlement System was launched in July 2023 and is facilitated by the Reserve Bank of India (RBI) through the Special Rupee Vostro Account (SRVA) framework. Under this mechanism, according to the Economic Times, UAE importers can pay in dirhams or rupees, which are routed through SRVAs held by UAE banks in India. This allows Indian exporters to be paid directly in rupees without converting each transaction into US dollars, lowering exchange costs and bypassing the need for the US dollar as an intermediary currency.
Challenges and Simplification Efforts
Despite the system's progress, businesses have flagged structural bottlenecks. Ambassador Mittal noted: "Businesses in their feedback have pointed to paperwork requirements, duplication of processes, or procedural delays. We are looking at how to simplify those processes and reduce friction points." The authorities are focusing on onboarding more banks, simplifying procedures, and widening participation to make cross-border transactions more efficient. The goal is to make the system more user-friendly for the business communities on both sides.
Forward Engagement and Popularisation
To accelerate adoption, the Indian Embassy plans to engage through chambers of commerce and roadshows, Ambassador Mittal stated. "The idea is to popularise the system among business communities on both sides. There will be engagement through chambers of commerce and roadshows," he said. This targeted outreach aims to educate traders and treasury professionals about the cost benefits and operational efficiency of settling trade in rupees and dirhams.
Implications for Trade Finance Professionals
For trade finance bankers, CFOs, and treasury teams, the expansion of local currency settlement presents an opportunity to reduce currency conversion costs and FX risk in bilateral transactions between India and the UAE. The use of SRVAs simplifies the payment chain and reduces dependency on the US dollar, which is particularly beneficial for commodity traders and companies active in oil and precious metals. However, the current concentration in those sectors and procedural friction points mean that broader adoption will require continued regulatory simplification and bank onboarding. Treasury professionals should monitor the simplification of paperwork and the extension of the system to more banks and sectors, as these developments could significantly alter the cost structure of India-UAE trade finance.
Sources:
