The fact that India’s refiner, Indian Oil Corporation, paid in rupees for the purchase of a million barrels of oil from the Abu Dhabi National Oil Company is good news for the country’s energy security. Settlement of even a part of its growing oil import bill in rupees would ease the strains on its current account. This follows another recent deal involving the sale of 25 kg of gold from a UAE-based exporter to an Indian buyer for approximately Rs 12.84 crore. In July, India signed an agreement with the UAE, allowing it to settle trade in rupees instead of dollars. India, in fact, sought to promote settlement of trade transactions in rupees in July 2022 to facilitate more trade with Russia (and neighbours like Sri Lanka), that is facing US-led sanctions for its war in Ukraine. But that hasn’t worked according to the script. India’s sourcing of deeply-discounted Russian oil has also entered an uncertain phase of late due to the breach of the price cap of $60 a barrel imposed by western nations and cuts in Russia’s crude exports by 500,000 barrels per day this month and 300,000 bpd next month. India must look for alternative sources of supplies.
Oil imports from the UAE rose by 76% to 290,000 bpd in July, albeit on a lower base in June. But if this uptrend gathers momentum, the rupee settlement augurs well for the comprehensive economic partnership between India and the UAE. Settlement in local currencies, however, would have made a much bigger difference for India’s burgeoning oil imports from Russia that rose 14-fold to $31.02 billion in FY23 from $2.2 billion in the previous fiscal. Although the rupee-rouble trading arrangement is in place with RBI approving the opening of special vostro accounts by several banks, Russia prefers the payment for oil in hard currencies to fund its ongoing war in Ukraine. So long as the oil was sold below the price cap of $60 a barrel, India had no problem in paying for it in US dollars.
But all of that has changed with Russia’s Urals blend hitting more than $73 a barrel in recent weeks, forcing India to explore other options, including trading via Singapore and Hong Kong. A small part of these imports were settled through yuan (and the UAE dirham) but that is not India’s preference. Although India’s dependence on Russian oil still continues, rising prices, lower discounts and higher shipping costs contributed to a drop in purchases of Russian oil by 25% in the first half of August. The prospect is for a similar order of purchases until October. But there are difficulties in paying for it without breaching western sanctions. For such reasons, the settlement of UAE oil in rupees should encourage India to pursue similar arrangements with other oil exporting countries in Africa from which it has been sourcing some of its oil.
The possibility of vostro accounts being used to transact in Singapore or Hong Kong dollars also needs to be explored. Russia and India need to discuss the modalities for settling their bilateral trade and make the rupee-rouble trading arrangement work. India has allowed banks in 22 countries to open vostro accounts to facilitate trade in rupees. Looking ahead, India must push the global acceptance of the rupee through its inclusion in the continuous linked settlement initiative which provides protection for cross-currency settlement in 18 currencies if its efforts to settle trade transactions in local currencies is to gain traction.