India, as the world’s third-largest energy consumer, has been making significant efforts to shift the paradigm of payment methods for crude oil imports. Traditionally, the default currency for such transactions has been the US dollar, following international trade practices. However, in an attempt to enhance the international standing of the Indian rupee, the Reserve Bank of India (RBI) took a ground-breaking step on July 11, 2022, by allowing importers to pay for crude oil in Indian rupees, with a corresponding provision for exporters to be paid in rupees as well.
Current Scenario for Indian rupee
Despite some success in non-oil trade with select countries, the oil ministry has revealed that the push for the Indian rupee as the preferred currency for crude oil payments has faced resistance from oil exporters. In the fiscal year 2022-23, no crude oil imports by oil Public Sector Undertakings (PSUs) were settled in Indian rupees. Notably, even major suppliers like the UAE’s Abu Dhabi National Oil Company (ADNOC) have expressed concerns regarding the repatriation of funds and the perceived high transactional costs associated with converting funds, coupled with exchange rate fluctuation risks.
Transactional Mechanism and RBI’s Initiatives
In response to these challenges, the RBI introduced the concept of rupee vostro accounts in partner trading countries. Under this mechanism, Indian importers conducting transactions through this avenue would make payments in Indian rupees, credited into the special Vostro account of the correspondent bank in the partner country. The ministry clarified that payments for crude oil could be made in Indian rupees, contingent on suppliers adhering to the relevant regulatory guidelines.
However, as of the current fiscal year, major entities such as Reliance Industries Ltd and oil PSUs have not entered into agreements with any crude oil supplier to conduct purchases in Indian currency for the supply of crude oil.
India’s Energy Landscape and Import Dynamics
India’s energy consumption is substantial, making it heavily reliant on crude oil imports to meet its needs. With domestic production covering less than 15 percent of the country’s requirements, India imports the majority of its crude oil, which is then processed at refineries to produce essential fuels like petrol and diesel. 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 emerging as its primary suppliers.
The Middle East played a pivotal role, contributing 58 percent of the total supplies, with 141.2 million tonnes sourced from the region. Notably, in the current fiscal year (April to November), India has already imported 152.6 million tonnes of crude oil at a cost of $113.4 billion.
Challenges and Concerns Raised by Oil Suppliers
The hesitancy of oil suppliers, including major players like ADNOC, to embrace Indian rupee payments stems from concerns related to the repatriation of funds and perceived high transactional costs. The oil ministry’s submission to the parliamentary standing committee underscored the reservations expressed by suppliers regarding the viability of conducting transactions in the Indian currency.
Transaction Costs and Impact on Oil PSUs
The Indian Oil Corporation (IOC), a prominent player in the sector, disclosed that it faced high transaction costs as crude oil suppliers passed on additional transactional expenses. The intricacies of currency conversion and the associated costs became a notable challenge for entities involved in crude oil transactions.
Global Implications and India’s Position
India’s push for the internationalization of the Indian rupee in crude oil transactions reflects its ambition to diversify payment methods and reduce dependency on the US dollar. However, the resistance from oil exporters suggests that the global acceptance of the Indian currency in the energy trade may take time to materialize.
In the context of the global oil trade, where the US dollar has traditionally been the dominant currency, India’s endeavours represent a departure from established norms. The success of such a transition would not only impact India’s economic dynamics but also have broader implications for the global financial landscape.
Oil Price Volatility and Impact on PSU Oil Firms
The oil ministry addressed the issue of price volatility, highlighting that Public Sector Undertaking (PSU) oil firms are indeed affected by the fluctuating prices of crude oil. However, the impact is limited to the extent of fuel and loss, with the prices of crude oil and refined petroleum products generally moving in tandem.
To mitigate the risks associated with price volatility, oil companies engage in hedging activities in the forward market. Hedging positions are established through Over the Counter (OTC) markets with registered international counterparties, and detailed reports are submitted to authorized dealer banks on a quarterly basis. Additionally, oil companies adopt hedging strategies to manage foreign exchange risks in line with their overall risk management policies.
As India continues to navigate the complexities of the global energy market, the outcome of its endeavours will not only impact its economic landscape but may also set a precedent for other nations seeking to diversify payment currencies in international trade. The journey towards the internationalization of the Indian rupee in the energy sector is a dynamic process that requires strategic planning, effective communication, and a commitment to addressing the concerns of all stakeholders involved.