India’s pioneering decision to pay for crude oil imports from the United Arab Emirates (UAE) using Indian rupees marks a significant shift in its global trade strategy.

This landmark move is seen as a step towards internationalising the Indian currency, especially as India looks to expand such arrangements with other suppliers.

India, reliant on imports for over 85% of its oil needs, has consistently pursued cost-effective procurement strategies. These include sourcing from the most affordable suppliers, diversifying import origins, and adhering to international commitments, such as the price cap on Russian oil imports.

UAE: A Key Investor and Oil Supplier

The UAE has emerged as the fourth largest investor in India in FY-23. The rupee settlement agreement, inked in July with the UAE, quickly led to the Indian Oil Corporation (IOC) making its first rupee-based payment for a million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC). This initiative also extends to some Russian oil imports, which have been settled in rupees.

Shifting Away from Dollar Dominance

Traditionally, the US dollar has been the default currency for crude oil imports, favoured for its liquidity and lower hedging costs. However, the Reserve Bank of India’s move to allow trade settlements in rupees with 18 countries signifies a strategic shift. This effort aims to enhance the rupee’s role in international trade, reducing India’s dependence on the dollar and its associated transaction costs.

Success with ADNOC and Future Prospects

India’s first successful rupee transaction with ADNOC in August is a milestone in this strategy. Officials assert that while there is no fixed target for internationalising the rupee, more such deals are anticipated. However, they caution that rupee settlements should not lead to increased trade costs or negatively impact trade dynamics.

Economic Implications and Challenges

The internationalisation of the rupee is expected to mitigate India’s vulnerability to global currency fluctuations and reduce its dollar demand. However, a recent parliamentary report indicates that the rupee’s acceptance in international markets is still limited. Concerns include the repatriation of funds in preferred currencies and the high costs associated with currency conversion and fluctuation risks.

India Oil Corporation’s Experience

The IOC’s experience highlights these challenges. It has faced increased transaction costs, as crude oil suppliers tend to pass on additional expenses to the buyer. Despite these hurdles, India remains committed to navigating these complexities in its national interest.

In conclusion, while India’s foray into rupee settlements for oil imports is a bold step towards currency internationalisation, it navigates a landscape riddled with financial and logistical challenges. The nation’s success in this endeavour could reshape its economic and strategic engagements on the global stage.