India, UAE Commence Crude Oil Trade Using Local Currency Settlement (LCS) Framework

August 16, 2023 Posted by India Briefing Written by Naina Bhardwaj Reading Time: 3 minutes

India and the United Arab Emirates (UAE) have achieved a significant trade milestone by successfully executing their first crude oil transaction using the Local Currency Settlement (LCS) mechanism on August 14, 2023. The initiative, endorsed by Indian Prime Minister Narendra Modi and UAE President Mohamed bin Zayed Al Nahyan, aims to boost economic ties by facilitating cross-border trade in local currencies. This move is expected to encourage a greater reliance on local currencies, enhancing the advantages derived from the Comprehensive Economic Partnership Agreement (CEPA).

In a bid to strengthen the economic alliance between India and the United Arab Emirates (UAE), the Abu Dhabi National Oil Company (ADNOC) and the Indian Oil Corporation Limited (IOCL) have successfully carried out the first-ever crude oil transaction under the Local Currency Settlement (LCS) framework on August 14, 2023. This landmark achievement involved the exchange of 1 million barrels of crude oil and signifies a pivotal shift in the cross-border trade approach between the two nations.

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This recent crude oil transaction marks the second instance of employing the LCS system between India and the UAE. The inaugural transaction occurred on July 15, 2023, coinciding with the signing of the Memorandum of Understanding (MoU) promoting the use of local currencies (INR-AED) for trade settlement. During this transaction, a notable UAE gold exporter named Peekay Intermark sold 25 kg of gold to an Indian buyer, YES Bank, with a total valuation of INR 128.4 million (US$1.54 million).

Local Currency Settlement (LCS) framework to boost cross-border transactions

The LCS agreement, endorsed in the presence of Prime Minister Narendra Modi and Mohamed bin Zayed Al Nahyan, President of the UAE and Ruler of Abu Dhabi, solidified a framework for employing local currencies in cross-border trade and is expected to yield several advantages for businesses, including:

Reduced transaction costs: Businesses will no longer incur fees associated with currency conversion, leading to cost savings.
Accelerated settlement times: Transactions will be processed in real-time, eliminating the multi-day delays typically experienced when settling in US dollars.
Enhanced predictability: With settlements conducted in local currencies, businesses can better manage their cash flow, as they will have a clear understanding of the exact amount they will receive in settlement.

Beyond its immediate effects, the LCS mechanism offers potential for the utilization of surplus local currency balances in various investment opportunities like corporate bonds, government securities, and equity markets. This aspect is expected to not only strengthen the economic ties between India and the UAE but also extend its influence to global economic interactions.

Trade milestones between India and the UAE: FY 2022-23 highlights

The bilateral trade relationship between India and the UAE has achieved remarkable milestones in the financial year (FY) 2022-23. The trade volume has surged from US$72.9 billion (April 2021 to March 2022) to US$84.5 billion (April 2022 to March 2023), reflecting a noteworthy year-on-year increase of 16 percent. Additionally, during the period of Comprehensive Economic Partnership Agreement (CEPA) implementation (May 2022 to March 2023), bilateral trade has grown from US$67.5 billion (May 2021 to March 2022) to US$76.9 billion (May 2022 to March 2023), representing an annual increase of 14 percent.

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As per the latest data from India’s Ministry of Commerce and Industry, India’s exports to the UAE reached an impressive value of US$31.3 billion in the fiscal year 2023, reflecting a remarkable year-on-year growth rate of 11.8 percent.

Some of the key sectors, including labor intensive sectors, that have witnessed significant export growth on account of the CEPA include: mineral fuels; electrical machinery (especially telephone equipment); gems and jewelry; automobiles (specifically the transportation vehicles segment); essential oils, perfumes and cosmetics (products related to beauty and skincare); other machinery; cereals (like rice); coffee, tea and spices; other agricultural products; and chemical products.

UAE’s pivotal role as India’s key energy partner

India and the UAE have long shared a robust energy partnership, with the UAE being a cornerstone of India’s energy security strategy. Petroleum and its derivatives have been the bedrock of the bilateral trade between the two nations, contributing significantly to their economies.

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 UAE holds a pivotal position in ensuring India’s energy stability. Recent data highlights the immense significance of this partnership, with petroleum products accounting for a substantial 41.4 percent of the total bilateral trade volume, amounting to US$35.10 billion in FY 2021-22.

Dezan Shira & Associates maintain an office in Dubai and can assist with corporate registrations, tax advisory, employee visa applications, bank account opening and other ongoing business and trade compliance matters. Please contact Maria Kotova at dubai@dezshira.com for assistance.

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