In a move that seems to herald a seismic shift in global trade, India, one of the BRICS nations, has convinced the UAE to abandon the US dollar in cross-border transactions, favouring the use of local currencies instead. This game-changing agreement, orchestrated by India, is expected to invigorate the Rupee and minimize foreign exchange transaction costs by eliminating the reliance on the US dollar.
The historic accord took place during Prime Minister Narendra Modi's recent visit to the UAE, where he met with the Crown Prince of Abu Dhabi, Sheikh Khaled bin Mohamed bin Zayed Al Nahyan. Their conversation bore fruit, leading to an agreement for a real-time payment link, a system poised to simplify cross-border remittances using local currencies.
According to the Reserve Bank of India (RBI), this innovative payment infrastructure is designed to facilitate seamless cross-border transactions and payments, fostering greater economic cooperation between the two countries.
This development could significantly impact bilateral trade, which between India and the UAE totalled an impressive $84.5 billion from April 2022 to March 2023. Until now, these transactions were conducted in US dollars; the future, however, is decidedly rupee-focused.
As the third-largest importer of oil globally, India stands to benefit significantly from utilizing the Rupee for international trade, a move that would further solidify its economic prowess. This shift, however, does not bode well for the US dollar, which could suffer as a consequence. The UAE, one of the top 10 oil exporters worldwide, agreeing to trade in local currencies further exacerbates the situation, threatening the value of the dollar.
The fiscal year 2022-23 witnessed India reaping benefits to the tune of $7 billion, achieved by using the Chinese Yuan for oil transactions. Interestingly, this oil was procured from Russia via China and Saudi Arabia, skirting around US sanctions. Both China and Saudi Arabia played their part in laundering Russian oil to Europe, India, and other nations, settling trades in local currencies.
Further showcasing its savvy economics, India exploited the US sanctions against Russia, procuring crude oil at discounted rates. From February 2022, India purchased a staggering $186.45 billion worth of crude oil from Russia via China, resulting in savings of $7.37 billion. In essence, these transactions, which would have cost $193.82 billion if conducted in US dollars, were settled with China using the Chinese Yuan, effectively bypassing the US dollar.
Key Indian refiners, including the Indian Oil Corp (IOC), have adopted this modus operandi, settling oil payments using the Chinese Yuan. These steps have been essential due to US sanctions preventing India from directly engaging in business with Russia.
Meanwhile, the Russian government, led by President Putin, is finding innovative ways to sustain its economy, seeking independence from the US dollar. Here, the BRICS group plays a crucial role in supporting the Russian economy, encouraging the use of the Chinese Yuan for international business.
This ground-breaking move by India signifies an ambitious challenge to the entrenched dollar dominance. While this could be seen as a potent example of economic prowess and financial autonomy, it also paints a picture of a shifting global economic landscape. The long-term effects are hard to predict, but the dollar's hegemony in international trade could be under significant threat. Should more nations follow suit, the implications for the US and its currency could be substantial.