Recently, the Reserve Bank of India (RBI) has requested banks doing business with the UAE to adopt the Indian rupee and the UAE dirham for direct settlement of a portion of trade payments. At the same time, India has restarted negotiations with the Russian central bank to expand the local currency settlement mechanism. In the current international situation, India is gradually reducing its dependence on the U.S. dollar.

　　The UAE is India's third largest trading partner, with trade between the two countries totaling more than $80 billion in 2023, according to the United Nations Commodity Trade Statistics Database. The UAE mainly exports crude oil to India, while India exports a portion of its refined chemicals and electrical appliances, among other things, to the UAE. At the same time, India has a large number of laborers and skilled professionals working in the UAE, and a large amount of remittances need to be transferred back to India from the UAE every year. The rupee and dirham direct settlement mechanism can help these people minimize losses due to exchange rate fluctuations.

　　Back in July 2023, India and UAE agreed to set up a framework for cross-border trade in local currencies and develop an alternative local currency settlement system to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Since then, the RBI has allowed UAE banks to open special rupee accounts in Indian banks for trade settlements and encouraged importers and exporters to use rupees and dirhams for direct transactions. In recent times, the RBI has asked domestic banks doing business with the UAE to seek funds in dirhams that can be matched from other banks when making payments to the UAE, avoiding the need for the banks to convert Indian rupees into US dollars in the international foreign exchange market, and then convert US dollars into dirhams, with the intention of bypassing the US dollar for international transactions. The process is still in its infancy, and the RBI has not proposed mandatory targets to the UAE, merely encouraging the rupee-dirham foreign exchange market to accelerate its formation.

　　Industry insiders believe that the settlement of local currencies between the two countries can help develop the rupee-dirham foreign exchange market and bring new opportunities to the Indian financial sector. More importantly, the rupee and dirham settlement mechanism if the development of perfect, will create India and other countries to carry out bilateral local currency settlement precedent, will not only prompt the rupee internationalization degree of deepening, but also can further reduce the dependence on the dollar.

　　In order to do this, India not only in the rupee and dirham settlement mechanism on the efforts, but also and the central bank of Russia recently restarted the expansion of the local currency settlement mechanism negotiations, aimed at solving the bilateral trade surge in recent years after the payment problem. The RBI and the RBI agreed on a base exchange rate that would allow for the formation of a facilitation mechanism between the rupee and the dirham, which would help the two countries settle their transactions in non-dollar currencies. This mechanism, if formed, will have a positive impact on trade for both countries and help break through sanctions barriers.

　　Reduce the dependence on the dollar, short-term view to help India to ease the pressure on foreign exchange reserves, reduce the loss caused by exchange rate fluctuations, long-term view can not only enhance the convenience of bilateral trade between India and a number of countries, but also let the rupee “go out”, so that India's international trade in the benefit of more. Of course, this is by no means easy. At present, India's international trade advantage is not obvious, manufacturing in the global competitiveness is not enough, coupled with India's domestic demand shortage, often prohibited exports, which led to India's commodities in the global accounted for a relatively low. World Trade Organization data show that in 2023, India's exports and imports of about 1.1 trillion U.S. dollars, ranked 14th in the world, accounting for 2.3% of global trade. Therefore, analysts believe that the Indian rupee in the internationalization of this road is not enough support, other countries for and India in the local currency settlement and other mechanisms on the discussion needs to consider many. For India, the government needs to find ways to enhance the hard power and stability of the Indian rupee, so that the UAE, Russia and other countries feel comfortable holding large amounts of Indian rupees.