NEW DELHI: The UAE and India are preparing to introduce bilateral transactions using local currencies, New Delhi’s envoy to Abu Dhabi said on Wednesday, with the move expected to boost the free trade deal between the two countries.

The UAE is India’s third-largest trading partner after the US and China, with a bilateral trade volume of $43.3 billion in 2020-21. It is also home to more than 3 million Indian expats, who send billions of dollars in remittances to their families each year.

In February, India and the UAE signed the landmark Comprehensive Economic Partnership Agreement. The pact, which went into force in May, reduces tariffs on almost 80 percent of all goods and provides zero-duty access to 90 percent of Indian exports.

India’s ambassador to the UAE, Sunjay Sudhir, told Arab News that the issue of trade settlements in local currencies was discussed during the 14th India-UAE Joint Commission meeting in Abu Dhabi in September.

Last week, it was also one of the major points of discussion when UAE Foreign Minister Sheikh Abdullah bin Zayed Al-Nahyan visited New Delhi.

“Since then there has been progress, a concept paper has been submitted by the Indian side to the UAE side, discussions are ongoing between the Reserve Bank of India and the UAE Central Bank,” Sudhir told Arab News, adding that modalities would be finalized “as soon as possible.”

Trading in local currencies — in the Indian-UAE context the rupee and dirham — not only reduces transaction costs but also frees trade from dependence on the US dollar.

“Trade between India and the UAE is mostly invoiced in dollars, which can be an expensive affair for businesses on both sides, due to foreign currency conversion fees and exchange rate risk,” Anupam Manur, economics professor from the Takshashila Institution in Bangalore, told Arab News.

He said for India it would also ease the pressure on the current account, halt the depreciation of the rupee and the depletion of forex reserves.

“This opens up the possibility of using a common payments system, such as UPI (Unified Payments Interface) to reduce the cost of remittances from Indians in (the) UAE and truly make capital flows easier,” Manur added.

“If the deal to trade in local currencies is successful then this would be a landmark deal and the model can be replicated with many other countries with which India has a strong trading relationship.”