India is considering creating a framework to make trade payments with Gulf countries in their local currency. Its objective is to protect the import expenditure of oil and other goods from external shocks, especially the current global tensions.
According to a Moneycontrol report, the move is aimed at reducing the risk of global uncertainties that could hamper trade and make imports expensive. Especially in the case of crude oil and petroleum products which India imports in large quantities from this region.
A government official said that we must ensure that whenever external uncertainties arise, such as the current conflict, India remains safe. The Gulf Cooperation Council (GCC) countries include Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Oman and Bahrain. Oil prices have fluctuated significantly in recent months, especially due to rising tensions in West Asia. The price of Brent crude has been varying between about $70 to $110 per barrel, increasing the risk of impact on global supply.
India will benefit
Since India meets about 85 percent of its crude oil needs through imports, such fluctuations in prices can increase the import bill, increase the trade deficit and also increase inflation. In this situation, trading in local currency can be beneficial. Especially because about 28 percent of India’s total crude oil imports in FY 2025 came from GCC countries, of which Saudi Arabia and UAE were the largest suppliers.
Officials said that doing business in domestic currency will reduce the need to make payments through dollars, which will reduce the cost of converting currency and will also reduce the impact of currency fluctuations. Another official said there was no immediate concern over dollar shortage, but the initiative was part of a larger plan to increase the use of the rupee in international trade.
Business in local currency instead of dollars
This initiative has come at a time when the rupee is weakening, making imports more expensive. An official said that we cannot accurately predict the movement of the rupee and imports are becoming increasingly expensive. Therefore, it is necessary that there should be such a system in which trade is done in local currency instead of dollars.
After the Comprehensive Economic Partnership Agreement (CEPA) was signed between India and UAE in February 2022, in July 2023 both the countries prepared a system of local currency payments (LCS) through their central banks. Under this system, business bills and payments can be made directly in Indian Rupees and UAE Dirhams, through designated bank accounts. This reduces transaction costs and also reduces exchange rate risk.
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