India’s Rupee Internationalization for Oil Payments Hits Roadblocks

India, the world’s third-largest consumer of crude oil, faces a significant challenge in its heavy reliance on imports to meet over 85% of its oil needs. This reliance exposes the country to the volatility of foreign exchange conversions to the U.S. dollar, the default currency in the international commodities market.

In 2022, the Indian government, led by Prime Minister Narendra Modi, embarked on a mission to internationalize the Indian rupee to address this vulnerability. One of the initial steps was taken by the Reserve Bank of India (RBI), which, on July 11, 2022, allowed importers to pay for oil in rupees and exporters to receive payments in the same currency.

To further this goal, the Modi administration sought to establish rupee vostro bank accounts with major international partners. These accounts allow domestic banks to act as custodians of foreign counterparts, facilitating forex settlements. By the end of the year, 22 countries, including several oil-producing nations, had agreed to open such accounts, according to information provided by the RBI. Among these countries were 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.

However, despite these efforts, the plan has faced challenges, particularly concerning crude oil payments. A report by newswire PTI in December indicated that India struggled to find takers for rupee payments for oil from July 2022 to June 2023. It wasn’t until July 2023 that India made its first-ever payment in rupees for crude oil purchased from the United Arab Emirates (U.A.E). Some deals, primarily for Russian oil, have since taken place, but there has been no significant shift. India has not set specific targets or timelines for the internationalization of the rupee, and market evidence suggests that it may be a challenging task.

One major obstacle is the current weakness of the rupee against the dollar, trading at its lowest level in over a decade and hovering around INR 82.50 to 83.50 to one U.S. dollar. This makes it less attractive for India’s trading partners to hold the rupee. Additionally, geopolitical factors have come into play. For instance, despite India’s interest in paying for Russian oil in rupees, Russia has shown a preference for China’s yuan or other currencies due to the trade balance leaning more in Moscow’s favor.

The Modi administration has also discouraged the use of currencies other than the rupee, particularly China’s yuan, by privately-held refiners. However, reports suggest that some payments to Russia in U.A.E. dirhams, instead of the yuan or rupee, are facing challenges due to complications associated with repatriating funds from the Emirates amid U.S. sanctions on Russia.

This situation has led to a decline in Russian oil exports to India, currently at an 11-month low of 1.5 million bpd, down from 1.95 million bpd in early 2023. However, India’s energy minister has attributed this decline to pricing issues rather than payment problems.

Despite these challenges, India’s oil demand is projected to increase by almost 1.2 million barrels per day between 2023 and 2030, accounting for over one-third of the global increase in oil demand during this period. As a result, a significant portion of India’s oil purchases will likely continue to be paid for in dollars.

India’s efforts to internationalize the rupee for oil payments face considerable hurdles, and it is unlikely to dislodge the dollar’s dominance in the commodities market anytime soon.