India is paying for its import of gold, among some other items, from the United Arab Emirates (UAE) in rupees, a senior Indian government official said, adding that the Emirati nation was using the same rupees to pay for some imports from India.
According to the official, who requested anonymity, the UAE is using rupees to pay for its gems and jewellery purchases from India.
The rupee settlement of trade between India and UAE for select commodities is being done via the Special Rupee Vostro accounts mechanism that was introduced by the Reserve Bank of India (RBI) in July 2022. Under the mechanism, Indian rupees can be used for invoicing, payment, and settlement of exports or imports.
The payment for gold imports in rupees, if only from UAE, is a key development as India is the largest importer of the yellow metal in the world. In December 2023, India's gold imports rose by a whopping 156.5 percent year-on-year to $3.03 billion, taking the total for the first nine months of 2023-24 to $35.95 billion – 26.6 percent more than the same period for 2022-23.
In contrast, India’s total merchandise imports in April-December 2023 were down 7.9 percent year-on-year at $505.15 billion.
At the same time, India’s gems and jewellery exports were up 14.1 percent year-on-year in the last month of 2023 at $2.90 billion, although they are down 16.2 percent at $24.31 billion so far in 2023-24, per latest data released by the commerce ministry on January 15.
The rupee settlement of trade between India and UAE is interesting given that the two countries signed a Memorandum of Understanding in July 2023 to set up a framework to use their respective local currencies to settle bilateral transactions. As per the MoU, a Local Currency Settlement System would be put in place to promote the use of the Indian rupee and the AED (UAE Dirham) bilaterally and would cover all current account transactions and permitted capital account transactions.
Separately, Director General of Foreign Trade Santosh Sarangi on January 15 said the increase in gold imports, and gems and jewellery exports might be partly explained by the import of gold using the advance authorisation scheme and re-export of gold jewellery after value addition. “Gold is coming through the advance authorisation route, mostly gold bars. It is then going out after conversion into jewellery. In some cases these are done by taking advantage of the rupee Vostro account that the Reserve Bank of India (RBI) allowed in July 2022.”
The Advance Authorisation Scheme allows duty free import of inputs, which are physically incorporated in an export product. In addition to any inputs, packaging material, fuel, oil, catalyst which is consumed or utilised in the process of production of the export product, is also to be allowed.
Notably, India and the UAE signed a Comprehensive Economic Partnership Agreement (CEPA) on February 18, 2022, that officially came into effect on May 1, 2022. Under the CEPA, both countries expect to boost bilateral trade to $100 billion within the next 5 years.
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