In another blow to dollar dominance, India and the UAE settled an oil trade without converting local currencies to dollars for the first time on Monday, as India’s top refiner made a payment for oil in rupees.

Indian Oil Corp. bought a million barrels of oil from Abu Dhabi National Oil Company in a dollar-free transaction.

Economists said the country should move with caution as there are a number of potential risks and disruptions in a de-dollarisation strategy — the process by which countries aim to reduce their reliance on the US dollar as the dominant global currency.

Biswajit Dhar, trade analyst and vice- president, Council for Social Development, said: “A large-scale rupee trade deficit would have serious issues. Also internationalisation of rupee could make simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy challenging for the RBI, unless this process is supported by large and deep domestic financial markets that could effectively absorb external shocks.”

The crude deal is the second major transaction under the local currency settlement system, with the first involving the sale of 25kg of gold from a leading UAE gold exporter to a buyer in India, valued at about Rs 128.4 million Indian rupees ($1.54 million), the Indian embassy in the UAE said.

N.R. Bhanumurthy, vice-chancellor, Dr BR Ambedkar School of Economics University, said: “The rupee settlement would reduce the exchange rate transaction cost. However, increased rupee trade has its own risks and parking of Indian currency could have serious implications for domestically oriented monetary policy measures.”