The Reserve Bank of India (RBI) has reportedly urged banks to ask their clients to settle trade between India and the United Arab Emirates (U.A.E.) using the Indian rupee or dirham.

The aim is to reduce the outflow of dollars on account of India's trade deficit with the Gulf nation, the report says citing a government official.

This comes a month after Prime Minister Narendra Modi and U.A.E. President Sheikh Mohamed bin Zayed Al Nahyan discussed developing the local currency settlement system between the two countries to settle bilateral trade.

India-U.A.E. trade rose to $85 billion in 2022, making the U.A.E. India's third-largest trading partner for the financial year 2022-23 and India's second-largest export destination. The two countries have set a target to double the non-petroleum bilateral trade to $100 billion by 2030.

India is the U.A.E.'s second-largest trading partner. In February 2022, India became the first country with which the U.A.E. signed a Comprehensive Economic Partnership Agreement (CEPA). Bilateral trade has increased by around 15% since the entry of the CEPA on May 1, 2022.

On June 12, Thani bin Ahmed Al Zeyoudi, Minister of State for Foreign Trade, U.A.E., had said that the Reserve Bank of India (RBI) and the Central Bank of the U.A.E. will sign an agreement to facilitate bilateral trade in rupee and dirham soon.

Commerce minister Piyush Goyal had earlier told Fortune India that the idea of rupee-dirham trade had come up in an informal meeting a year ago.

The RBI and the Central Bank of U.A.E. have been in very active dialogue not only on rupee dirham trade but also on other digital technologies (payment tools) becoming a part of the U.A.E.-India framework in the coming months.

Last month, PM Modi and U.A.E. President Nahyan expressed their interest in strengthening cooperation in the payment systems area by enabling integration between their instant payment systems to process cross-border transactions between the U.A.E. and India more efficiently. "Such cooperation will also include the mutual acceptance of domestic card schemes by interlinking national card switches. Integration between these systems will enhance access to payment services for the benefit of the citizens and residents of the two countries," they said in a joint statement.

Indian rupee is gaining ground in bilateral trade settlements amid declining share of US dollar in world’s forex reserves. To stem dollar outflow, policymakers in India's neighbourhood have started signing rupee trade settlement deals. In April, Bangladesh became the 19th country that signed for bilateral trade settlements in Indian rupee. Such bilateral deals are a big boon for nations like Bangladesh that run trade deficits with India.

After the Russia-Ukraine war, India along with other BRICS nations have started signing trade settlement deals in their own currencies by-passing US Dollar. Recently, India and Malaysia reached a bilateral agreement to settle trades in Indian rupee in addition to the current modes of settlement in other currencies.

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