In another blow to dollar dominance, India and the United Arab Emirates 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. The transaction involved the sale of about a million barrels of crude oil with Indian rupees.

The move is significant since energy accounts for a major part of trade between India and the UAE.

The India-UAE Comprehensive Economic Partnership Agreement (CEPA) has resulted in bilateral trade growing by about 16.5 per cent, hitting an all-time high of around $84.84 billion during the 2022-23 fiscal (FY23).

Economists, however, said the country should move with caution as there are a number of potential risks and disruptions that need to be carefully considered before embarking on 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 internationalization of rupee could make simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy challenging for RBI, unless this process is supported by large and deep domestic financial markets that could effectively absorb external shocks.”

Dhar said “a crucial reason for China’s success in managing currency internationalisation with capital controls is its trade surplus with the rest of the world.”