India's bid to broaden the acceptance of its currency, particularly in settling crude oil imports with the rupee, has met resistance from trade partners, recent reports from the country’s oil ministry revealed.
Crude oil suppliers, such as the Abu Dhabi National Oil Company (ADNOC) from the UAE, have raised worries about repatriating funds in the preferred currency, according to statements made to a parliamentary standing committee by the oil ministry. They also highlighted high transactional costs linked to currency conversion and the potential risks of fluctuations in exchange rates.
As per standard international trade practices, the default currency for crude oil import contracts is the U.S. dollar. However, to globalize the Indian currency, the Reserve Bank of India (RBI) authorized importers from 18 countries and more than a dozen banks from July 11, 2022, to use rupees for settlements.
Under this arrangement, Indian importers will pay in rupees, which will be credited to a special Vostro account held by the correspondent bank in the partner country against invoices for goods or services supplied by overseas sellers or suppliers.
During the Indian financial year 2022-2023 that concluded in March, the country's oil ministry informed that no oil imports were paid for in rupees.
Then, in July, India signed an agreement with the UAE for a rupee settlement. However, no other traders have taken the risk of settling trades in the rupees after that. Soon after, the IOC made payments for the purchase of a million barrels of crude oil from ADNOC in Indian rupees.
"Currently, Reliance Industries Ltd and oil PSUs do not have an agreement with any crude oil supplier to make purchases in Indian currency for the supply of crude oil," the ministry said.
Reliance on imports
As the world's third-largest energy consumer, India heavily relies on imports for over 85 percent of its oil needs, as domestic production only meets less than 15 percent. Crude oil is imported to produce fuels like petrol and diesel at refineries.
India's strategy involves three key approaches: sourcing from the most cost-effective options, diversifying supply sources, and ensuring compliance with international obligations, such as avoiding breaches in agreements like the price cap with Russian oil.
In the 2022-23 fiscal year, India spent $157.5 billion on importing 232.7 million tonnes of crude oil, with Iraq, Saudi Arabia, Russia, and the UAE being its primary suppliers. Among these, 141.2 million tonnes originated from the Middle East, amounting to 58 percent of the total supplies. In the current fiscal year (from April to November), India imported 152.6 million tonnes of crude oil, totaling $113.4 billion in expenditure.
In July, the IOC completed payments to acquire a million barrels of crude oil from ADNOC using Indian rupees. Apart from that, there had been no successful transactions using the local currency. There have been discussions regarding using rupees to settle trade with Russia since May, but as of present, neither nation has reached an agreement.
Broader ongoing de-dollarization initiative
India's efforts to globalize the rupee align with a broader initiative among BRICS nations to diminish dependence on the dollar in global payments and investments. The movement, termed de-dollarization, has gathered momentum in response to the U.S. utilizing the dollar's widespread influence to impose economic sanctions on nations like Russia and Iran, prompting BRICS countries to seek alternatives.
China and Russia have similarly aimed to enhance the global adoption of their respective currencies. Within the BRICS group, discussions have revolved around the potential of establishing a common currency, but tangible progress on this front has yet to materialize.
A pilot initiative in China's Hunan province and Ghana exploring local currency-based trade mechanics can set an example for BRICS, said Dr Lauren Johnston, Senior China/Africa Researcher of the independent think tank SAIIA.
Hunan's Renminbi hub is testing a system where bilateral traders pool currency payments, utilizing local currency up to the minimum trade level to ensure consistent demand for the less-utilized currency. Although this may not prompt global monetary system reforms, it enables numerous small and medium-sized traders to engage in foreign trade without exposure to foreign exchange risks.