India is actively expanding its Free Trade Agreements (FTAs) with key global economies, including the UAE, Australia, Japan, South Korea, the European Union, and the UK. While these agreements aim to enhance bilateral trade volumes, realising their full potential hinges critically on integrating Central Bank Digital Currency (CBDC) corridors. To maximise trade efficiency, India’s FTAs should explicitly include a condition that mandates transitioning trade settlements to CBDC channels, with fintech companies ideally managing these transitions to ensure swift, scalable, and cost-effective implementation.
One of the most significant barriers currently affecting international trade efficiency is the high conversion cost incurred when transactions involve multiple currencies. Typically, multi-currency trade — for instance, converting the Indian Rupee to the US Dollar and subsequently to the UAE Dirham — incurs costs ranging from 3.7 per cent to 8 per cent of the transaction value. These costs result from multiple foreign exchange spreads, intermediary correspondent bank charges, and regulatory margins. CBDC-enabled corridors, allowing direct settlements between central banks in digital currencies, eliminate these intermediary costs, drastically reducing conversion expenses to approximately 0.1-0.2 per cent. This reduction equates to substantial potential savings of 3-8 per cent per transaction.
The evolving India-UAE trade relationship provides a clear illustration. Historically, India primarily conducted its oil trade with the UAE in US dollars until the onset of Russia’s invasion of Ukraine in February 2022 and the subsequent exclusion of Russian banks from the SWIFT system in March 2022. The disruption led India and the UAE to rapidly transition away from dollar-based settlements, culminating in a July 2023 agreement to facilitate trade directly in Rupees and Dirhams. On August 14, 2023, India conducted its first oil transaction with the UAE in rupees. By August 2024, the Reserve Bank of India was actively encouraging banks to prioritise direct Rupee-Dirham settlements.
Yet, despite bypassing the dollar, structural complexities still impose transaction costs between 3.7 per cent and 8 per cent. Establishing a CBDC-based corridor, ideally managed by fintech platforms, can further reduce these costs, saving India between $3.1 billion and $6.7 billion annually on its approximately $84 billion in bilateral trade with the UAE. These savings are particularly valuable in oil, petrochemicals, and fertiliser feedstock trades, which can be passed on to the consumers in India.
Similar benefits would accrue with Australia, where bilateral trade totals approximately $25 billion annually, with a focus on critical minerals such as lithium and cobalt, as well as agricultural products like wheat and pulses. Direct CBDC settlements managed via fintech platforms could produce annual savings of between $0.9 billion and $2 billion, significantly enhancing economic margins for Indian industries in battery manufacturing, renewable energy technologies, and food security.
With Japan, a key partner that trades primarily in electronics, semiconductors, and gold, amounting to $20 billion annually, CBDC integration could result in annual transaction savings of $0.7-1.6 billion. Rapid fintech-enabled settlement processes and programmable contracts would optimise supply chains and streamline financial operations.
The South Korea corridor, where annual bilateral trade totals about $16 billion in steel, automotive components, and electronics, could benefit similarly, realising cost reductions of $0.6-1.3 billion annually through CBDC-enabled direct settlements.
India’s forthcoming trade agreement with the EU holds greater promise. Given the scale of trade, approximately $100 billion annually in commodities alone, integrating CBDC-based direct settlement through fintech platforms could yield additional annual transaction cost savings of between $3.7 billion and $8 billion. This could benefit high-value trade segments such as pharmaceuticals, engineering goods, automotive parts, and chemical products.
Programmable smart contracts represent another transformative dimension made possible by fintech-managed CBDC corridors. Smart contracts automate transaction execution upon predefined conditions, instantly triggering payments upon shipment delivery or completion of quality checks, thereby significantly reducing administrative overhead and legal uncertainties. This digital programmability enhances transparency, traceability, and trust between trading partners.
India’s successful prior integration of UPI with the UAE’s FAST system offers a compelling model, demonstrating the viability of fintech-driven payment solutions. Extending this experience to wholesale transactions via CBDC, managed by fintech platforms, is the natural progression for large-scale trade, particularly in oil, creating a replicable blueprint across other strategic relationships.
Integrating explicit conditions in India’s FTAs mandating a swift transition to CBDC settlements, ideally managed through fintech platforms, promises significant cost efficiencies — potentially up to 16 per cent total savings on trade transactions, or tens of billions of dollars annually. Coupled with enhanced regulatory coordination, robust technological integration, and innovative smart contracts, these digital corridors will transform India’s international trade landscape, firmly establishing it as a digitally enabled, globally competitive economic powerhouse.
