India’s attempt to shift its oil payments to rupees, as part of a broader strategy to reduce dependence on the U.S. dollar, has encountered setbacks, according to recent disclosures by the Indian Oil Ministry. The initiative aimed to have oil producers accept payments in the local currency, but the ministry acknowledged that it has not gained traction.
India’s de-dollarization push faces repatriation issues
Citing concerns raised by oil suppliers, including the United Arab Emirates ADNOC, the ministry outlined challenges related to the repatriation of funds. The perceived high cost of converting the rupee to other major currencies has been cited as a key reason for the failure of this policy. Some oil producers have expressed reservations about the rupee’s weaknesses against the U.S. dollar, deeming it an unfavorable payment method. In the fiscal year 2022-23, there were no crude oil imports settled in rupees, according to the ministry.
Notably, the Indian Oil Company (IOC) reportedly paid a premium above the prevailing price, underscoring the limitations of the country’s de-dollarization efforts in the oil sector. Additionally, the ministry revealed that major players like Reliance Industries Ltd and oil public sector undertakings (PSUs) have yet to reach agreements to pay in rupees with any supplier. The Reserve Bank has permitted oil importers to pay with rupees and exporters to receive payments in rupees since July 11, 2022, in a bid to reduce reliance on the U.S. dollar for cross-border transactions.
Despite the setbacks in the oil sector, the de-dollarization policy has achieved some success in specific non-oil trade transactions. It is noteworthy that India’s regional counterpart, China, has successfully established agreements with certain oil-producing countries, allowing it to conduct transactions in its currency, the yuan. While India’s goal of paying for oil with rupees faces challenges, the broader policy of reducing dollar dependency has made headway in other areas of trade. The concerns raised by oil suppliers about the repatriation of funds and the perceived high transactional costs associated with converting rupees to other major currencies have highlighted the complexities involved in transitioning away from the U.S. dollar.
Limited success beyond oil payment issues
These challenges pose significant hurdles to India’s efforts to reshape its payment mechanisms in the global oil trade. The failure to settle crude oil imports in Indian rupees during the specified fiscal year underscores the resistance and apprehensions within the oil sector regarding the viability of the rupee as a primary currency for transactions. The fact that major entities like the Indian Oil Company and key PSUs have not embraced rupee payments further emphasizes the uphill battle India faces in achieving widespread acceptance of its de-dollarization strategy.
While the Reserve Bank of India’s permissions marked a significant policy shift, allowing for greater flexibility in payment methods, the actual implementation faced barriers from the oil suppliers’ perspective. The premium paid by the Indian Oil Company over the prevailing price indicates the financial implications of attempting to shift away from established currency norms in the oil trade. In contrast to the challenges in the oil sector, the report acknowledges partial success in non-oil trade transactions. The specifics of these achievements are not detailed, but the implication is that India’s de-dollarization efforts have found more favorable ground in certain sectors beyond the oil industry.
As global economic dynamics continue to evolve, the intricacies of currency transactions and the geopolitical landscape play pivotal roles in shaping the success or failure of de-dollarization policies. India’s experience serves as a case study of the complexities involved in reshaping longstanding practices in the international trade arena. India’s endeavor to pay for oil with rupees as part of its de-dollarization strategy has encountered hurdles, with oil suppliers expressing concerns about fund repatriation and transactional costs. The failure to secure agreements with major players in the oil sector highlights the resistance to this shift.