India’s Bid To Pay For Crude Oil In Rupee Faces Headwinds Amidst Supplier Concerns

India's move to use the Rupee as the default payment for crude oil imports has hit a roadblock, with oil suppliers expressing apprehensions about fund repatriation and citing high transactional costs. According to the Oil Ministry's submissions to a parliamentary standing committee, despite efforts to promote the Indian currency, suppliers, including UAE's ADNOC, continue to favour the traditional US Dollar payment.

The Reserve Bank of India (RBI) granted permission on July 11, 2022, for importers to pay in Rupees and exporters to receive payments in the same currency. However, the Oil Ministry announced that for the fiscal year 2022-23, no crude oil imports by oil Public Sector Undertakings (PSUs) were settled in Indian Rupees.

The ministry's report, presented in Parliament last week, highlighted concerns raised by crude oil suppliers regarding the repatriation of funds and the associated high transactional costs. Indian Oil Corporation (IOC) reported incurring substantial transaction costs, with suppliers passing on additional expenses to the IOC.

The RBI's attempt to facilitate the process involved permitting the opening of Rupee Vostro accounts in partner trading countries. Under this mechanism, Indian importers make payments in Indian Rupee, which are credited into the special Vostro account of the correspondent bank in the partner country against invoices for the supply of goods or services.

"Payments for crude oil can be made in Indian rupee, subject to suppliers complying with regulatory guidelines in this regard," the Ministry stated. However, major players like Reliance Industries Ltd and oil PSUs currently lack agreements with crude oil suppliers to conduct transactions in Indian currency.

India, being the world's third-largest energy consumer, relies heavily on oil imports, meeting over 85% of its needs through foreign purchases. In the fiscal year 2022-23, the country spent $157.5 billion on importing 232.7 million tonnes of crude oil. Iraq, Saudi Arabia, Russia, and the UAE were the primary suppliers, with the Middle East contributing 58% of total supplies.

For the ongoing fiscal year, from April to November, India imported 152.6 million tonnes of crude oil, amounting to $113.4 billion. The ministry informed the parliamentary committee that India's daily oil consumption stands at about 5.5-5.6 million barrels, with approximately 10% of the world's oil trade being accounted for by the country's imports.

Highlighting the impact of price volatility, the ministry acknowledged that Public Sector Undertaking (PSU) oil firms are affected by fluctuations in crude oil prices, impacting fuel costs and profits.

India's pursuit of making the rupee a prominent currency in the global oil trade faces challenges, and the government, along with the RBI, may need to address supplier concerns and work towards establishing agreements with major oil players for transactions in the Indian currency.