In a groundbreaking development that underscores the deepening ties between India and the United Arab Emirates (UAE), the two nations successfully carried out their first-ever crude oil transaction using their respective local currencies. The transaction, conducted under the newly implemented Local Currency Settlement (LCS) system, involved the sale of approximately 1 million barrels of crude oil between the Abu Dhabi National Oil Company (ADNOC) and the Indian Oil Corporation Limited (IOCL). This milestone marks a significant step forward in the economic collaboration between the two nations.
The LCS mechanism, which was established through a historic Memorandum of Understanding (MoU) exchanged on July 15, 2023, between Prime Minister Narendra Modi and Mohamed bin Zayed Al Nahyan, President of the UAE and Ruler of Abu Dhabi, offers several advantages to both countries. Notably, the use of local currencies—Indian Rupees and UAE Dirhams—reduces transaction costs and processing times, providing a more efficient and streamlined process for cross-border trade.
The strong oil and gas relationship between India and the UAE has been a cornerstone of their bilateral ties for years. The UAE is a critical partner in ensuring India’s energy security, and petroleum and petroleum products have long formed the bedrock of their trade relationship. Last year alone, petroleum product trade between the two countries amounted to a staggering USD 35.10 billion, constituting 41.4% of their total bilateral trade. The UAE ranks as the fourth-largest source of crude oil and the second-largest source of liquefied natural gas (LNG) and liquefied petroleum gas (LPG) for India.
The implementation of the LCS system not only facilitates smoother transactions but also holds the potential for broader economic transformations. Beyond enhancing bilateral trade ties, the surplus balance in local currencies can now be utilized for investments in local currency assets such as corporate bonds, government securities, and equity markets. This innovation has the potential to redefine economic engagements not only between India and the UAE but on a global scale.
This marks India’s first-ever Local Currency Settlement, and its adoption aligns with India’s strategic goal of reducing dependence on foreign currencies for international transactions. With this mechanism in place, traders can now opt for payment currencies based on mutual agreement, fostering a flexible and dynamic trading environment. The LCS system is a step towards leveraging preferential terms, in addition to those conferred by the Comprehensive Economic Partnership Agreement (CEPA), and ultimately strengthens the economic bonds between India and the UAE.
While the crude oil transaction stands as the second significant transaction under the LCS mechanism, following the exchange of the MoU on July 15, the first transaction took place on that very day. This initial transaction involved the sale of 25 kg of gold from a prominent UAE gold exporter to an Indian buyer, valued at approximately 12.84 crore Rupees. These transactions collectively signal a promising future for cross-border trade and financial collaboration between India and the UAE.
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