India's attempt to pay for oil with rupees as part of its de-dollarization strategy has faced obstacles as suppliers express concerns about repatriating their funds. The country's Oil Ministry recently admitted that the initiative has failed to gain traction due to the perceived high costs of converting rupees and potential risks associated with exchange rate fluctuations.
High Transactional Costs of Converting Rupees
The Indian Oil Ministry revealed to a parliamentary standing committee that its efforts to convince oil producers to accept payment in the local currency have not been successful. One of the reasons cited for this failure is the perceived high cost of converting rupees into other major currencies.
The ministry also noted that oil suppliers, including the United Arab Emirates' ADNOC, have expressed concerns about repatriating their revenues. They believe that the weakness of the rupee against the U.S. dollar makes it an unfavorable payment method.
According to a report in the Economic Times, no crude oil imports by oil PSUs were settled in Indian rupees during the fiscal year 2022-23. The report mentioned that crude oil suppliers, including ADNOC, have raised concerns about the repatriation of funds in their preferred currency and the high transactional costs associated with converting funds, along with the risks posed by exchange rate fluctuations.
The Indian Oil Company (IOC) has reportedly paid a premium over the prevailing price, highlighting the extent of India's de-dollarization failure. Additionally, the Oil Ministry stated that Reliance Industries Ltd and oil public sector undertakings (PSUs) have not reached any agreement to pay in rupees with any supplier.
Reserve Bank of India's Decision
Since July 11, 2022, the Reserve Bank of India (RBI) has allowed oil importers to pay in rupees and exporters to receive payment in rupees. This decision aims to reduce India's dependence on the U.S. dollar for cross-border transactions. In contrast, India's regional rival, China, has already established agreements with some oil-producing countries to use its currency, the yuan, for payments.
Partial Success in Non-Oil Trade Transactions
Although India's efforts to pay for oil with rupees have not been successful, its de-dollarization policy has achieved some success in certain non-oil trade transactions. However, the challenges faced in the oil sector highlight the need for further measures to address concerns regarding repatriation and transactional costs.
India's de-dollarization push, aimed at reducing its reliance on the U.S. dollar for oil payments, has encountered obstacles due to concerns about repatriating funds and high transactional costs. While some progress has been made in non-oil trade transactions, the failure to convince oil suppliers to accept rupee payments highlights the need for further efforts to achieve de-dollarization in the oil sector.
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