UAE, India Settle Crude Oil Transaction Using National Currencies

The United Arab Emirates (UAE) and India have taken a groundbreaking step in their trade relationship by agreeing to settle crude oil transactions using their own national currencies.

This means that the Indian Rupee and the UAE Dirham will be used for these transactions, which is a major shift in how international trade is usually conducted.

This new way of trading will help both countries save time and money. Normally, when countries trade with each other, they use intermediary currencies like the US dollar, which can add extra costs and time to the process.

By using their own currencies directly, India and the UAE can avoid these extra steps and expenses.

This is made possible through a system called the Local Currency Settlement (LCS) mechanism, which was established through a Memorandum of Understanding (MoU) signed during Indian Prime Minister Narendra Modi‘s visit to the UAE in July.

The first transaction using this LCS mechanism involved the sale of about 1 million barrels of crude oil. Both Indian rupees and UAE dirhams were used for the payment.

This method is expected to not only boost economic cooperation between the two countries but also strengthen their overall relationship.

The LCS mechanism gives traders the flexibility to decide which currency to use for payment based on mutual agreement.

This approach also has benefits beyond just saving money. Any extra balance in local currencies resulting from these transactions can be invested in things like corporate bonds, government securities, and equity markets. This can help both countries grow their economies further.

Interestingly, this isn’t the first time India has used the LCS mechanism. Earlier, a transaction involving the sale of 25 kilograms of gold was completed using this system.

This successful gold transaction demonstrated the effectiveness and efficiency of using national currencies directly.

This move is especially important because petroleum and petroleum products make up a significant portion of the trade between India and the UAE.

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Last year, these products accounted for about 41.4% of their total trade volume, which was worth a massive US$35.10 billion.

The UAE is a major source of crude oil for India, thus both countries need full support & trust of each other.