RBI Pushes for Rupee Payments in Oil Imports

March 6, 2024

The Reserve Bank of India (RBI) has instructed India’s major state-owned refiners to press Persian Gulf oil suppliers to accept at least 10% of oil payments in rupees in the upcoming financial year. This move is aimed at promoting the Indian currency in international trade and reducing the country’s dependence on the US dollar.

India’s Growing Energy Demand and Currency Concerns

India is the world’s third-largest crude importer and is expected to be the leading driver of global oil consumption growth this decade. The government is concerned that India’s booming demand for energy will put downward pressure on the rupee. By leveraging the growth in consumption, the RBI seeks to promote the use of the Indian currency in international trade.

State-Owned Refiners Approach Oil Exporters

Three major state-owned refiners – Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. – have already approached oil exporters regarding the rupee payment proposal. However, the suppliers are pushing back due to concerns over currency risk and conversion charges.

The oil exporters’ resistance to accepting rupee payments stems from the potential currency risk and the associated conversion charges. To address this issue, the RBI has asked the Indian refiners to bear a portion of the currency transaction charges. However, the refiners are also resisting this idea, as it would erode their profit margins.

Dominance of the US Dollar in Global Oil Transactions

The vast majority of global oil transactions are conducted in US dollars. China has had some success in using the yuan to pay for its oil imports, but the dollar remains the dominant currency in the global oil trade.

Previous Instances of Non-Dollar Payments

In August last year, Indian Oil partly paid Abu Dhabi National Oil Co for a shipment of 1 million barrels of crude in rupees. However, there haven’t been any transactions in the Indian currency since then. India’s refiners have also used other currencies, including UAE dirhams, to pay for Russian crude oil imports.

Challenges in Implementing Rupee Payments

The implementation of rupee payments for oil imports faces several challenges:

Currency Risk: Oil exporters are concerned about the potential fluctuations in the value of the rupee, which could impact their revenues.
Conversion Charges: The conversion of rupees to other currencies may incur additional charges, which oil exporters are reluctant to bear.
Resistance from Refiners: Indian state-owned refiners are hesitant to bear the currency transaction charges, as it would impact their profit margins.
Limited Precedence: While there have been instances of non-dollar payments for oil imports, such as the use of rupees and UAE dirhams, these occurrences have been limited and sporadic.

Potential Benefits of Rupee Payments

Despite the challenges, the RBI’s push for rupee payments in oil imports could yield several benefits:

Reduced Dependence on the US Dollar: By promoting the use of the rupee in international trade, India can reduce its reliance on the US dollar and minimize the impact of dollar fluctuations on its economy.
Strengthening the Indian Currency: Increased use of the rupee in global trade could help strengthen the currency and enhance its international standing.
Leveraging India’s Growing Energy Demand: As India’s energy consumption continues to grow, the country can use its market power to negotiate favorable terms, including the use of its own currency for payments.

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