Rupee as a reserve unit has a long way to go yet
Over the weekend, India and the UAE signed pacts to allow settlement of bilateral trade in local currencies and also interlink our Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP). They also agreed to link payment card switches. Linking UPI with IPP will make transfers of money across the Arabian Sea far easier, a matter of a few keystrokes on a phone.
Since the Indian diaspora there sends home large remittances, and plenty of trade takes place, such a system could allow savings on the high transaction costs of older channels. Smoother card swipes would be a help too. The big move, though, is the de-dollarization attempt implied by mutual acceptance of local currencies for trade.
With India-UAE shipments swelling, the facility may help cut conversion bills. Although the UAE dirham’s dollar peg would still mean a role for the US currency in rate dynamics, the project is apiece with efforts to keep bilateral ties free of third-party disruption. It also envisions a messaging set-up that could potentially be scaled up as an alternative to the West’s Swift system, weaponized as it was over hostilities in Ukraine.
Since all this is aimed at de-risking trade in the context of unprecedented economic sanctions slapped by the US on Russia—with the latter’s foreign assets frozen and Swift access disrupted—it is well warranted from a strategic perspective. The vulnerabilities of dollar dependence have prompted many countries to explore diverse options should they happen to lose US favour. International use of the Indian rupee, however, also has broader benefits.
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