The Abu Dhabi National Oil Company (ADNOC) and the Indian Oil Corporation Limited (IOCL) completed the first-ever crude oil transaction under the recently implemented Local Currency Settlement (LCS) system, marking a historic development that represents a significant step towards enhancing bilateral economic ties.
About 1 million barrels of crude oil were sold in the deal, and both Indian Rupees (INR) and UAE Dirhams (AED) were used as payment. According to a press release from the Indian embassy in the United Arab Emirates, “LCS is likely to have a transformational impact not only on the bilateral economic relationship but in the larger economic engagements across the world.”
A Memorandum of Understanding (MoU) was exchanged during Prime Minister Narendra Modi’s visit to the UAE on July 15 of last month, and as a result, the LCS mechanism was created. The use of national currencies in cross-border transactions will be encouraged by this agreement, which is also anticipated to dramatically cut transaction costs and time.
The LCS mechanism gives traders the freedom to decide on a mutually agreeable payment currency. Additionally, the excess local currency balance left over after transactions can be invested in a range of local currency assets, including corporate bonds, government securities, and equities markets. This ground-breaking strategy is expected to drastically alter not only the economic ties between India and the UAE but also more general economic interactions around the globe.
Although the exchange involving oil between ADNOC and IOCL is the second significant one under the LCS, the first exchange involved gold. In the previous transaction, 25 kg of gold were sold to a customer in India by a well-known UAE gold exporter; the invoice’s value was roughly Rs 12.84 crore. This profitable gold transaction served as proof of the LCS mechanism’s viability and effectiveness.
A significant share of the two countries’ bilateral commerce is made up of petroleum and petroleum-related items. Petroleum product trade alone accounted for astonishing US$ 35.10 billion in trade volume just last year, or 41.4% of all bilateral commerce. The UAE is India’s second-largest supplier of LNG and LPG, as well as its fourth-largest supplier of crude oil.