The Reserve Bank of India (RBI) was nudging local banks to ask their clients to settle trade between the United Arab Emirates (UAE) and India using the dirham (AED) or the rupee (INR) to reduce US-dollar-based transactions, five sources told the Reuters on Monday. 

The move was a part of the RBI’s broader aim of promoting settlement in local currencies with countries with which India had a trade deficit, with the knock-on effect of boosting the rupee’s global reach, three banking sources said. 

India’s trade deficit with the UAE was $21.62 billion in 2022-23, or 8.2 per cent of its total deficit, government data shows. In July, the two countries agreed to facilitate trade in rupees instead of dollars. 

The idea, a government source said, was to reduce the outflow of dollars on account of this trade deficit. 

“The RBI has asked banks to encourage clients and corporate (entities) to initiate INR-AED trades gradually, instead of using the dollar,” said a treasury official of a private bank. 

An RBI official communicated this message verbally to foreign exchange dealers at a seminar this month, four sources said. This communication had not been previously reported. 

None of the sources wished to be named because they were not authorised to speak to the media. The RBI and trade ministry did not respond to a Reuters’ email seeking comment.