Dubai: More UAE and India-based businesses cutting across industries plan to introduce settlements in the rupee or the dirham and remove the US dollar from the equation.
The cost benefits from doing so would be immediate for businesses in the UAE with sizeable supply contracts from India and vice-versa.
The push by businesses for rupee-based deals comes as a new NDA alliance is all set to assume power on June 8. It was last year that the UAE and India brought in local currency - rupee or dirham – settlements into their trade deals.
“What has essentially been a government-to-government process so far will get increased take up from businesses in the UAE and India,” said the CEO of a Dubai-based retail group with extensive supply arrangements from India. “It’s only natural that the benefits of rupee or dirham settlements start gaining prominence in B2B deals too.”
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Remove dollar costs
Historically, cross-border business-to-business deals between entities in the UAE and India have been settled in dollars. And there is always a fee element coming into the equation when the dollar becomes part of the process.
“Now, remove the dollar element and business deals struck in rupee or dirham settlements will have one less cost to factor in,” said Sanjeev Dutta of UAE-India Business Council. “That’s significant for businesses in the UAE and India with sizeable exposures in either markets.
“What UAE businesses must know is that these rupee settlement option is not limited to certain sectors.”
Steps involved in the AED-INR process
- Correspondent banks open INR/AED accounts for banks and other residents to pay and receive in local currencies.
- SRVA (Special Rupee Vostro Account) mechanism can be deployed in India with full repatriation facility. (A Vostro account is where domestic banks hold for foreign banks in the formers' domestic currency.)
- Allows use of existing banking systems and correspondent banking relationships to ease transaction processes.
I always cite the example of many Swiss luxury watches actually cost less in India, despite high import duty, than in the UAE. That's because of the direct Swiss Franc-INR settlements. The same effect will be there with AED-INR and eschewing the dollar
Push by India central bank
In fact, just weeks after the UAE and India struck the deal on rupee-dirham transactions, the Reserve Bank of India was prompting businesses in that country to use that option, according to media reports. The RBI’s intent was to reduce the outflow of dollars where possible.
It’s unlikely that this focus on preserving India’s dollar reserves will not subside any time soon, banking and currency market sources say. (India’s dollar reserves were pegged at around $646 million plus by end May.)
In recent days, the Indian rupee remains close to its lowest point ever of 22.73/22.74 to the dirham as the markets took in the election results and the fact that it will be a collation government that will be formed.
Early today (June 7), the rupee opened at 22.71 to the dirham (or 83.45 to dollar) against 22.72 yesterday. FX market sources suggest that INR could slip to a new low, at around the 22.77-22.80 levels.
UAE gold importers among early adopters
The move to allow rupee-dirham in trade deals was a natural outcome of the UAE-India CEPA (Comprehensive Economic Partnership Agreement), which went into effect on May 1, 2022.
The gold and jewellery sector was seen as an immediate beneficiary from the CEPA signing, through lower import duty and the like.
To ease AED-INR transactions, all banks must equip themselves with operational knowhow and real ease of doing business policies
UAE’s imports of gold from India was also seen as ideally placed to deploy rupee settlements. “Yes, we had contemplated the use of rupee contracts,” said Abdul Salam K. P., Vice-Chairman of Malabar Group. “Since the intricacies of the economy has changed - and is ever changing vastly - we need to tread this cautiously.
“The rupee trade settlement agreement between the UAE and India is a welcome proposition for the gold dealers to settle their payments. To do so all banks must equip themselves with the required operational knowhow and ease of doing business policies
“If this is successful, it will go a long way towards maintaining India’s foreign exchange reserve balance.”
More sectors will benefit from INR-AED
Dr. Sahitya Chaturvedi is Head of Finance at Dubai headquartered Ajmal Group as well as being the secretary-general of the Indian Business & Professional Council Dubai chapter. He reckons that multiple categories within the wider UAE retail sector should be thinking of rupee settlements on their India exposures.
“An increase of up to 20 per cent can be expected on imports from India into the UAE after CEPA,” said Chaturvedi. “And the boost from the bilateral MoU on rupee-dirham settlements through the UPI (United Payments Interface) of India and the UAE’s Instant Payments Platform.
“Using local currencies in such deals will significantly increase in categories such as textiles, electronics, food commodities, and even when it comes to (high-tech) services.
“If we are to see less of the US dollar as an intermediary for settling cross-border transactions, it clearly helps with managing the time and currency conversions costs.”
The RuPay option is already there for Indian tourists in UAE wanting to spend in rupees. For businesses, the INR settlement option will have a telling effect in managing their FX costs better, especially in high volatility phases
A 'case-to-case' basis
Some business chiefs, however, argue that rupee or dirham settlements should be considered only on a case-to-case basis. "Sure, this approach allows for invoices to be raised in rupees, streamlining the process and saving time and exchange rate costs," said Dr. Dhananjay Datar, Managing Director of Al Adil Group.
"Opting for rupee-based settlements with suppliers in India can indeed be flexible arrangement - but make sure to negotiate on a case-by-case basis. This offers a more stable - and predictable - financial framework for transactions between parties."
What AED-INR settlements bring about is a predictable framework for businesses to transact - that's a massive boost
That ties in with the bigger picture from the UAE-India CEPA deal. Offering flexibility is part of that process, and allowing businesses in either country to choose what services them best - the dollar-based transaction or the rupee-dirham - is part of that flexibility.
Businesses are just fine with that...
