India, UAE step up efforts to expand re-dirham trade

More than 15% of India-UAE bilateral trade has been invoiced in local currencies (Indian Rupee and UAE Dirham) since the rupee-dirham settlement mechanism wa...

What Happened

More than 15% of India-UAE bilateral trade has been invoiced in local currencies (Indian Rupee and UAE Dirham) since the rupee-dirham settlement mechanism was formally launched nearly three years ago (July 2023).
Both governments are now intensifying efforts to deepen adoption — focusing on onboarding more banks into the Special Rupee Vostro Account (SRVA) framework, simplifying regulatory procedures, and reducing compliance friction for businesses.
Industry representatives have cited structural bottlenecks: limited awareness among smaller exporters/importers, hedging instrument gaps for the rupee-dirham pair, and procedural complexity in reconciling transactions across two banking systems.
The push aligns with both countries' strategic interest in reducing transaction costs, settlement time, and exposure to US dollar volatility in their bilateral trade.
India-UAE bilateral trade has crossed USD 100 billion for the second consecutive year and is targeting USD 200 billion by 2032 under the CEPA framework.

Static Topic Bridges

India-UAE Comprehensive Economic Partnership Agreement (CEPA) 2022

India and the UAE signed a CEPA on February 18, 2022 — India's first CEPA in over a decade and the fastest-ever negotiated (concluded in 88 days). It entered into force on May 1, 2022.

Key provisions: - Tariff concessions on ~90% of tariff lines (by number); UAE eliminated duties on ~97% of Indian exports - Priority sectors: Gems and jewellery, textiles and garments, pharmaceuticals, engineering goods, food products - Services: Liberalisation in over 100 service sub-sectors (IT, healthcare, professional services) - Investment facilitation: Reduced barriers for UAE capital into India's infrastructure, fintech, logistics

Trade targets: - Short-term target: USD 100 billion (achieved ahead of schedule) - New target: USD 200 billion by 2032 (excluding oil; inclusive target would be higher)

Strategic context: UAE is India's 2nd-largest export destination and 3rd-largest trading partner. India is the UAE's 2nd-largest trading partner. The Indian diaspora in the UAE (~3.5 million) makes it a key remittance corridor.

Connection to this news: The CEPA created the institutional momentum and bilateral goodwill that enabled the rupee-dirham local currency settlement (LCS) agreement, signed July 2023. Expanding LCS adoption is seen as the next frontier in deepening CEPA-driven trade integration.

Rupee-Dirham Local Currency Settlement (LCS) Mechanism — How It Works

Background: The India-UAE LCS framework was formalised in July 2023, building on the RBI's broader framework for international trade settlement in Indian Rupees (July 2022 circular).

Mechanics of the Special Rupee Vostro Account (SRVA):

A Vostro account ("your account with us" in Latin) is an account held by a foreign bank with an Indian correspondent bank, in Indian Rupees. Under the SRVA framework:

An authorised UAE bank opens a Special Rupee Vostro Account with an RBI-authorised Indian bank.
Indian importers (buying from UAE) pay in INR into this SRVA account.
Indian exporters (selling to UAE) receive payment in INR from this SRVA account.
The UAE importer/exporter deals in Dirhams on their side — conversion happens at the UAE bank level.
Surplus INR balances in SRVAs can be deployed in RBI-approved Indian investments (Government securities, treasury bills, equity under FEMA limits).

Scale of SRVA framework (as of early 2026): - RBI has permitted 123 correspondent banks from 30 trading partner countries to open 156 SRVAs with 26 Indian banks. - The UAE is among the most active SRVA jurisdictions alongside Russia, Bangladesh, and Sri Lanka.

First crude oil transaction: The first crude oil purchase from the UAE using the LCS mechanism was executed on August 14, 2023 — a milestone in rupee-denominated commodity trade.

Structural bottlenecks identified by industry (2026): - Limited depth in INR-AED forward/hedging markets — businesses cannot easily hedge currency risk on the dirham-rupee pair - Correspondent banking gaps — not all UAE banks are onboarded; smaller traders face connectivity issues - Reconciliation complexity when trade involves multiple sub-suppliers across jurisdictions - Residual preference for USD due to its role as pricing currency for commodities (crude oil, gold)

Connection to this news: The 15% local currency invoicing figure reflects genuine traction but also the ceiling imposed by these structural bottlenecks. The current intensification effort focuses precisely on the onboarding and procedural simplification side.

De-dollarisation vs Rupee Internationalisation — Distinction

These two concepts are related but distinct:

De-dollarisation: Reducing global dependence on the US dollar as the world's primary reserve, trade-invoicing, and commodity-pricing currency. A systemic, geopolitically driven trend — associated with BRICS discussions, China's yuan-based trade, and US sanctions weaponising dollar access.

Rupee Internationalisation: India's specific goal of increasing the use of the Indian Rupee in cross-border trade, payments, and investment — reducing India's own dollar dependency, transaction costs, and external vulnerability.

India's broader LCS network (as of 2026): India has signed bilateral Local Currency Settlement arrangements with: UAE (most active), Russia (significant volume post-2022), Sri Lanka, Bangladesh, Maldives, Bhutan, Nepal, and is in discussion with several Southeast Asian partners.

Important caveat: Rupee-dirham settlement reduces the dollar's role in India-UAE bilateral trade but does not constitute "de-dollarisation" at a global scale. Commodities like crude oil and gold — major items in India-UAE trade — are globally priced in USD; LCS arrangements invoice the settled amount in local currencies but the reference price remains USD.

Connection to this news: India's push to expand rupee-dirham invoicing fits within its broader rupee internationalisation strategy, reducing forex costs for exporters and importers while deepening the bilateral economic relationship established under CEPA.

India's External Sector Context

India-UAE trade (2025-26): ~USD 100+ billion (2nd consecutive year crossing this threshold)
UAE's share in Indian exports: ~8-9% (2nd largest export destination)
Remittances: India-UAE is India's largest remittance corridor (~USD 20 billion annually from ~3.5 million Indian diaspora in UAE)
India's CAD (Current Account Deficit): Typically 1.5-2% of GDP; reducing transaction costs on bilateral trade directly supports CAD management
RBI's forex reserves: ~USD 680 billion (as of mid-2026), providing buffer against rupee volatility that businesses cite as a deterrent to LCS adoption

Key Facts & Data

LCS mechanism launch: July 2023 (India-UAE formal agreement)
First crude oil LCS transaction: August 14, 2023
Local currency invoicing share: >15% of India-UAE bilateral trade (as of June 2026)
India-UAE trade volume: Crossed USD 100 billion for second consecutive year
Trade target under CEPA: USD 200 billion by 2032
CEPA signed: February 18, 2022; in force from May 1, 2022
SRVA framework (all countries): 156 accounts; 123 correspondent banks; 30 countries; 26 Indian banks
RBI LCS framework circular: July 2022 (enabling international trade settlement in INR)
SRVA mechanism: Foreign bank holds INR with Indian correspondent bank; surplus deployable in G-secs/T-bills
CEPA negotiation: Completed in 88 days — fastest CEPA India has concluded
Indian diaspora in UAE: ~3.5 million; largest single-country diaspora in UAE
Bottlenecks: Limited INR-AED hedging depth, partial bank onboarding, reconciliation complexity