The Reserve Bank of India (RBI) has directed major state-owned refiners in India to encourage Persian Gulf oil suppliers to accept at least 10% of oil payments in rupees in the upcoming financial year. This initiative aims to boost the standing of the Indian currency in global trade and reduce the country’s dependency on the US dollar.
Concerns Over Energy Demand and Currency Stability
As the world’s third-largest crude importer and a key driver of global oil consumption growth, India faces concerns that its surging energy demand could exert downward pressure on the rupee. The RBI, leveraging the nation’s growing consumption, seeks to propel the use of the Indian currency in international trade.
State-Owned Refiners Navigate Currency Conversations
Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp., the three major state-owned refiners, have initiated discussions with oil exporters regarding the proposal for rupee payments. However, exporters are expressing reservations due to worries about currency risk and conversion charges.
Oil suppliers are hesitant to accept rupee payments due to potential currency fluctuations and associated conversion charges. To address these concerns, the RBI has suggested that Indian refiners share a portion of the currency transaction charges. Nevertheless, refiners are resisting this idea, fearing its impact on their profit margins.
Dollar Dominance in Global Oil Transactions
The predominant currency for global oil transactions remains the US dollar. While China has made some strides in using the yuan for oil payments, the dollar continues to dominate the global oil trade.
Past Instances of Non-Dollar Transactions
In August of the previous year, Indian Oil made a partial payment to Abu Dhabi National Oil Co for a crude shipment in rupees. However, such transactions have been sporadic, and there haven’t been subsequent instances of rupee payments. Indian refiners have also utilized other currencies, including UAE dirhams, to settle payments for Russian crude oil imports.
Challenges in Implementing Rupee Payments
Several challenges impede the seamless implementation of rupee payments for oil imports:
- Currency Risk: Oil exporters are wary of potential rupee value fluctuations affecting their revenues.
- Conversion Charges: The conversion of rupees to other currencies may incur additional charges, a burden exporters are unwilling to bear.
- Refiner Resistance: State-owned refiners are hesitant to absorb currency transaction charges, fearing an impact on their profit margins.
- Limited Precedence: While non-dollar payments have occurred sporadically, a consistent pattern has not been established.
Potential Benefits Amidst Challenges Despite the challenges, the RBI’s advocacy for rupee payments in oil imports could yield significant benefits:
- Reduced Dollar Dependence: By encouraging rupee usage in global trade, India can decrease its reliance on the US dollar, minimizing the impact of dollar fluctuations.
- Currency Strengthening: Increased global use of the rupee could strengthen the currency and enhance its international standing.
- Leveraging Energy Demand: With India’s energy consumption on the rise, the nation can negotiate favorable terms, including the use of its currency for payments, thereby leveraging its market power.