India has made its first-ever payment in rupees for crude oil obtained from the UAE, marking a significant move in the country's initiative to promote the global use of its local currency. Officials have emphasized that this groundbreaking step is part of a broader strategy to explore similar deals with other oil suppliers.

The initiative comes as India, the world's third-largest energy consumer, pursues a three-pronged strategy to address its oil needs. This strategy includes purchasing from the most cost-effective sources, diversifying the supply chain, and ensuring compliance with international obligations, such as price caps, particularly in the context of Russian oil.

With more than 85% of India's oil needs dependent on imports, the country's focus on sourcing from the cheapest available suppliers is driven by the goal of meeting demand efficiently. The move to make rupee payments is seen as a step toward reducing dependence on traditional currencies in global transactions.

India's strategy, aimed at saving billions of dollars by sourcing Russian oil post-Ukraine war, involves settling trade in rupees rather than dollars. The move aims to reduce transaction costs by eliminating the need for dollar conversions. In July, India formalized an agreement with the UAE for rupee settlement, and subsequently, Indian Oil Corporation (IOC) made payments for the purchase of a million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC) in Indian rupees.

Traditionally, the default payment currency for crude oil imports has been the US dollar, offering liquidity and lower hedging costs. However, to enhance the rupee's role in cross-border payments, the Reserve Bank of India has granted permission to over a dozen banks to settle trades in rupees with 18 countries since last year.

India has been actively encouraging major oil exporters like the UAE and Saudi Arabia to embrace the Indian currency for trade settlements. The initial success occurred in August when the Indian Oil Corporation (IOC) made a rupee payment to Abu Dhabi National Oil Company (ADNOC). Officials anticipate more such deals in the future but emphasize that internationalization is a gradual process with no specific targets.

The focus is on ensuring that rupee settlement does not lead to increased costs or pose any detriment to trade. Officials acknowledge the complexities involved, particularly with large transactions such as shiploads of crude oil costing millions of dollars, and stress that India is navigating the situation with national interests in mind.

A recent parliamentary report revealed low interest in the Indian rupee, particularly in the fiscal year 2022-23. The report noted that no crude oil imports by oil PSUs were settled in Indian rupees during this period. Crude oil suppliers, including UAE's ADNOC, expressed concerns about fund repatriation and cited high transactional costs and exchange fluctuation risks.

The ministry, contributing to the committee's recently tabled report in Parliament, stated that India Oil Corporation (IOC) reported incurring elevated transaction costs. This was attributed to crude oil suppliers transferring the additional transactional costs to IOC.

Image source: The Economic Times