India is the world’s third-largest consumer of crude oil. But being reliant on imported oil to service over 85% of its needs leaves the burgeoning economy at the mercy of painful foreign exchange conversions to the U.S. dollar – the default currency of the international commodities market.
Cognizant of this, in 2022 the country’s government and Prime Minister Narendra Modi set about its mission to internationalize the Indian rupee. As a first step, on July 11, 2022, India’s central bank – the Reserve Bank of India (RBI) – allowed importers to pay with rupees and exporters be paid in rupee.
The Modi administration also courted major international partners to open rupee vostro bank accounts, a mechanism for domestic banks to act as custodians of foreign counterparts for facilitating forex settlements. Around 22 countries duly obliged within a year of the move including a few oil producers, according to information provided by RBI.
They included Bangladesh, Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kazakhstan, Kenya, Malaysia, Maldives, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the U.K.
Few takers and lots of ‘crude’ aggro
However, the plan has stuttered since it was conceived primarily with the burden of crude oil payments in mind. In December, newswire PTI reported that India found no takers for rupee payments for oil from July 2022 to June 2023. But a month later, in July 2023, the country finally made its first-ever payment in rupees for crude oil purchased from the United Arab Emirates (U.A.E), the newswire added.
India’s Ministry of Petroleum and Natural Gas said the deal involved a payment in rupees by the Indian Oil Corporation (IOC) for the purchase of 1 million barrels of oil from Abu Dhabi National Oil Company (ADNOC).
A few other deals, primarily for Russian oil, do appear to have taken place, but there has not been much movement. India has offered no specific targets or advised timelines in its bid to internationalize the rupee. Market evidence suggests it may not be easy in any case.
The rupee is currently trading at its lowest against the dollar in over a decade, and appears stuck within a very narrow range of INR 82.50 to 83.50 to one greenback. Therefore, it makes little sense for many of India’s international trading partners to hoard its currency given its lack of relative strength.
Geopolitical discord also seems to have reared its head with those willing to accept the rupee internationally. For instance, having discovered a penchant for discounted and Western sanctions ridden Russian crude – the rupee should have been an easy sell to Moscow.
But the Russians aren’t keen on the currency given the bilateral trade balance between both countries leans more towards Moscow than Delhi. Instead, the Russians appear keener to accept payments in China’s yuan in lieu of the dollar.
That’s something India’s privately-held refiners are doing already. But the Modi administration, while not explicitly forbidding it, certainly frowns on it seeing China as a regional and geopolitical rival, according to Reuters and domestic media reports.
Sources suggest Delhi’s suggestion of making some payments in U.A.E. dirhams, instead of the yuan, if not the rupee, are also running into trouble. Complications associated with repatriating funds from the Emirates in the wake of a fresh wave of U.S. sanctions on Russian oil are blocking that avenue.
The kerfuffle has likely led to a decline in Russian crude exports to India, currently lurking at an 11-month low of 1.5 million bpd. That’s down from 1.95 million bpd in early 2023 or nearly 40% of Indian crude imports.
However, that’s been denied by India’s energy minister Hardeep Singh Puri who said last month that the decline in Russian imports was down to “pricing” and not “payment issues.”
Impossible to ditch the dollar
Of course, less Russian oil means more from others including Saudi Arabia, Iraq, U.S. and the U.A.E, all of whom – with the exception of the Emiratis – do not appear willing to except anything other than dollars to service India’s need.
Those needs are rising. At the India Energy Week conference in February, the International Energy Agency (IEA) said India is projected to record an oil demand increase of almost 1.2 million barrels per day (bpd) between 2023 and 2030.
That accounts for over one-third of the projected 3.2 million bpd of global increases in the period. No matter what happens from hereon, and whom India buys oil from, bulk of those purchases will likely be paid for in dollars. For context, India should perhaps look at its arch rival China, and a bigger importer of many commodities including oil.
After over a decade of market chatter about China’s efforts to prop up the yuan, the currency’s share of the world’s currency reserves stood at just over 2% of global forex reserves at the end of Q3 2023, according to the International Monetary Fund (IMF) versus the dollar’s at 59%. Delhi is about to find out how difficult, or rather impossible, it will be to dislodge the greenback and its deep connection with the commodities market any time soon.