Virendra Pandit
New Delhi: Enthused after paying the UAE in Indian rupees for importing crude, India is now looking to internationalize its currency and awaits more takers of its currency in global trade.
With over 85 percent oil dependence on imports, India aims to cut transaction costs by settling trades in rupees instead of US dollars. This shift to rupee payments for crude oil from the UAE marks a significant move towards globalizing its currency, the media, quoting officials, reported on Monday.
In July, India signed an agreement with the UAE for a rupee settlement. Soon afterward, the Indian Oil Corporation (IOC) made payments for the purchase of a million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC) in Indian rupees. Some of the Russian oil imports too have been settled in rupee.
India’s first-ever payment in rupees for crude oil purchased from the UAE is helping the world’s third-largest energy consumer push for taking the local currency globally, as it looks for similar deals with other suppliers, officials said, adding internationalization is an ongoing process and there are no set targets. More such deals may happen soon.
India has been pursuing a three-pronged strategy of buying from the cheapest available source, diversifying sources of supply, and not breaching any international obligation like the price cap in the case of Russian oil.
While the strategy helped save billions of dollars, when it ramped up imports of Russian oil that was shunned by some in the West post-Ukraine war, it is looking to settle trade in rupees instead of dollars in a bid to cut transaction costs by eliminating dollar conversions.
Officials said the default payment currency for import of crude oil has been the US dollar for several decades and the currency traditionally has liquidity as well as lower hedging cost.
But to boost the rupee’s role in cross-border payments, the RBI in 2022 allowed over a dozen banks to settle trades in Indian rupees with 18 countries.
Since then, India has been encouraging big oil exporters, such as the UAE and Saudi Arabia, to accept the Indian currency for trade settlements and tasted the first success in August 2023 when the IOC made the rupee payment to ADNOC.
“We must ensure this settlement in rupees does not lead to an increase in cost and is in no way detrimental to the trade,” an official said.
“Settling a trade in rupee where the amount is not big does not pose much problem but when you have each shipload of crude oil costing millions of dollars, there are issues.”
India is navigating the situation keeping overarching national interest in mind.
The internationalization of the rupee will help reduce dollar demand and make the Indian economy less vulnerable to global currency shocks.
A Standing Committee report, tabled in Parliament last week, stated that there were not many takers for the Indian rupee so far.
Officials said that situation was true for the 2022-23 fiscal and there has been a rupee trade this year.
“During FY 2022-23, no crude oil imports by oil PSUs were settled in Indian rupee. Crude oil suppliers (including UAE’s ADNOC) continue to express their concern on the repatriation of funds in the preferred currency and also highlighted high transactional costs associated with conversion of funds along with exchange fluctuation risks,” the Petroleum Ministry told the panel.
The ministry, whose submissions are part of the committee’s report, said the IOC has informed that it incurred high transaction costs as crude oil suppliers pass on the additional transactional costs to the IOC.