Our lead story this week covers a bilateral achievement between India and UAE. The inaugural crude oil transaction between the Abu Dhabi National Oil Company (ADNOC) and the Indian Oil Corporation Limited (IOCL) marks a significant step not only between both countries but is indicative of the larger phenomenon of the de-dollarization of the world economy. This groundbreaking deal, conducted under the newly introduced Local Currency Settlement (LCS) system, involved the sale of approximately 1 million barrels of crude oil. Both the Indian Rupees (INR) and the UAE Dirhams (AED) were utilized for the settlement process. This became possible through the Local Currency Settlement wherein there is room to choose the payment currency based on mutual agreement. Moreover, the surplus balance in local currencies resulting from transactions can be invested in various local currency assets such as corporate bonds, government securities, and equity markets. A statement from the Indian mission in UAE said, "LCS is likely to have a transformational impact not only on the bilateral economic relationship but in the larger economic engagements across the world."

The LCS mechanism was established as a result of a Memorandum of Understanding (MoU) exchanged during Prime Minister Narendra Modi's visit to UAE last month. While the oil transaction between ADNOC and IOCL is the second major exchange under the LCS, the first transaction was of gold. This transaction involved the sale of 25 kg of gold from a prominent UAE gold exporter to a buyer in India, with the invoice totaling approximately Rs 12.84 crore. This successful gold transaction demonstrated the feasibility and efficiency of the LCS mechanism. Why a deal on crude oil is even more important is because petroleum and petroleum products still constitute around 40% of the total bilateral trade by volume between the two countries.