India-UAE INR/Dirham Trade Settlement

The India–UAE INR/Dirham trade settlement mechanism is a bilateral arrangement that enables trade between India and the United Arab Emirates to be settled in their respective domestic currencies—the Indian rupee (INR) and the UAE dirham (AED)—instead of relying exclusively on third-country reserve currencies. This framework represents a significant development in India’s external sector strategy and reflects a broader shift towards local-currency trade settlement to enhance financial resilience, reduce transaction costs and deepen economic ties. In the context of banking, finance and the Indian economy, the mechanism strengthens cross-border payment efficiency while supporting monetary and financial stability.
India and the UAE share one of India’s most important trade relationships, spanning energy, gems and jewellery, food products, engineering goods and services. The move towards INR/Dirham settlement builds on this strong commercial foundation.

Background and policy rationale

Traditionally, India–UAE trade has been largely invoiced and settled in international reserve currencies. While efficient, such arrangements expose both sides to exchange rate risk, external liquidity conditions and higher transaction costs.
The adoption of local-currency settlement aligns with India’s long-term objective of promoting the international use of the rupee and reducing dependence on external currencies for trade. For the UAE, it enhances flexibility in trade finance and reinforces its role as a global financial and trading hub connecting Asia, the Middle East and Africa.

Institutional and regulatory framework

The settlement mechanism operates under the regulatory oversight of the Reserve Bank of India and the Central Bank of the UAE. Both regulators enable authorised banks to offer local-currency settlement facilities for eligible cross-border trade transactions.
Designated banks in India and the UAE act as intermediaries, opening special accounts to facilitate settlement flows. These arrangements are embedded within existing foreign exchange management and anti-money laundering frameworks, ensuring regulatory compliance and financial integrity.

Operational structure of INR/Dirham settlement

Under the mechanism, Indian importers make payments in rupees to Indian banks, which credit corresponding accounts linked to UAE banks. UAE exporters receive dirham payments domestically, while Indian exporters may receive rupees from balances accumulated through trade flows.
This system reduces reliance on international correspondent banking networks and enables faster settlement. Over time, balanced trade flows help recycle accumulated balances, supporting smoother operation of the mechanism.

Role of banks and financial institutions

Banks play a pivotal role in implementing the INR/Dirham settlement framework. They are responsible for transaction processing, currency conversion, compliance checks and liquidity management.
For Indian banks, the mechanism expands their role in international trade finance and enhances their engagement with Gulf-region financial institutions. It also supports innovation in payment systems and cross-border banking services.

Impact on trade and the Indian economy

The INR/Dirham settlement framework is particularly significant given the scale of India–UAE trade, including energy imports and high-value exports such as gems and jewellery. Settling trade in local currencies reduces foreign exchange demand and moderates exposure to global currency volatility.
For the Indian economy, this contributes to external sector resilience and supports smoother current account management. Lower transaction costs and faster settlement also improve the competitiveness of Indian exporters in the UAE market.

Exchange rate and pricing considerations

A key operational challenge in local-currency settlement is exchange rate determination. Although both the rupee and dirham are relatively stable, pricing contracts requires transparent and mutually accepted benchmarks.
Unlike major reserve currencies, deep derivative markets for direct INR/AED hedging are limited. As a result, currency risk management relies largely on contractual arrangements and natural hedging through balanced trade flows.

Strategic and geopolitical significance

Beyond economics, the INR/Dirham settlement mechanism carries strategic significance. It reflects deepening financial cooperation between India and the UAE and supports broader economic partnership initiatives.
The framework also aligns with global trends towards diversification of payment systems and reduced over-dependence on a narrow set of international currencies, enhancing policy autonomy for participating countries.

Financial stability and regulatory considerations

From a financial stability perspective, local-currency settlement reduces exposure to sudden disruptions in global payment systems. However, regulators remain vigilant about concentration risks, liquidity imbalances and operational resilience.
Both central banks emphasise strong governance, transparency and compliance to ensure that innovation in cross-border payments does not compromise systemic stability.

Limitations and practical constraints

Despite its advantages, the INR/Dirham settlement mechanism faces limitations. Persistent trade imbalances can lead to accumulation of surplus balances, while limited investment avenues for these balances may restrict scalability.
Private sector adoption may also be gradual, as firms assess pricing, liquidity and operational considerations. Consequently, the mechanism is most effective when supported by strong bilateral trade volumes and policy coordination.