India First Rupee Payments for Oil Signal Shift in Global Trade Dynamics

A groundbreaking development, India has made its first-ever payment in rupees for crude oil purchased from the United Arab Emirates (UAE), marking a significant stride towards establishing the Indian currency on the global stage. As the world's third-largest energy consumer, India is looking to diversify its trade strategies, reducing dependency on the US dollar and exploring new avenues for economic growth.

Traditionally, the default payment currency for crude oil imports has been the US dollar, offering liquidity and lower hedging costs for several decades. However, India's recent foray into settling trade in rupees aims to cut transaction costs by eliminating the need for dollar conversions, a move that could potentially revolutionize global trade dynamics.

With more than 85% of its oil needs dependent on imports, India has adopted a three-pronged strategy to secure its energy requirements: sourcing from the most cost-effective suppliers, diversifying its sources of supply, and adhering to international obligations, such as price caps in the case of Russian oil.

Notably, India's strategic approach helped it save billions of dollars when it increased imports of Russian oil post-Ukraine war, despite Western reservations. Now, the country seeks to take the local currency global, starting with the agreement signed with the UAE for rupee settlements. The Indian Oil Corporation (IOC) recently made history by making payments for a million barrels of crude oil from the Abu Dhabi National Oil Company (ADNOC) in Indian rupees.

This move is not an isolated incident, as some Russian oil imports have also been settled in rupees, showcasing India's commitment to diversifying its trade payment methods. The Reserve Bank of India has played a pivotal role by permitting over a dozen banks to settle trades in rupees with 18 countries since last year, aiming to bolster the rupee's role in cross-border payments.

While the road to internationalizing the rupee is a gradual process, India has successfully encouraged major oil exporters, including the UAE and Saudi Arabia, to consider the Indian currency for trade settlements. The IOC's successful rupee payment to ADNOC in August this year is seen as a positive step, and officials anticipate more such deals in the future.

However, officials emphasize that internationalization is a nuanced process, and there are no specific targets set. Caution is warranted to ensure that rupee settlements do not lead to increased costs or pose risks to trade. In the words of one official, "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."

The broader objective of the rupee's internationalization is to reduce dollar demand, making the Indian economy less vulnerable to global currency shocks. A recent parliamentary standing committee report acknowledged the challenges, stating that there were not many takers for the Indian rupee in the fiscal year 2022-23. However, officials highlight that progress has been made, and India is navigating the situation with a focus on overarching national interest.

Conclusion 

India's move towards rupee payments for oil signals a bold shift in its approach to global trade. While challenges remain, the potential benefits, including reduced dependency on the US dollar and increased global prominence for the rupee, make this a strategic move that could reshape the dynamics of international commerce.