India continues to step up its purchase of deeply-discounted Russian oil to enhance its energy security despite western pressures to reduce such imports. India has green-lighted invoicing and settlement of trade transactions in rupees to “support the increasing interest of the global trading community in INR”. For starters, the expectation was that this move would facilitate more trade with Russia (and neighbouring countries like crisis-ridden Sri Lanka) that is facing punitive western sanctions and enable importers to pay for expensive oil and coal in rupees. But if Russia is seeking payment for its oil supplies to some Indian customers in UAE’s dirhams according to Reuters, these developments are not playing according to the script. Not so long ago, India’s largest cement manufacturer purchased Russian coal using yuan. No doubt, Moscow is moving away from the US dollar to sell commodities abroad. The fact that the rupee does not figure in these plans on the energy front does not augur well for a full-fledged return of rupee-rouble trade although in a limited way such trade is taking place for some defence items and services.
Settlement of a part of India’s growing imports of crude oil in rupees would definitely ease the strains on its current account or goods and services trade with the rest of the world. This would in turn reduce the demand for dollars to finance such imports and ease the downward pressure on the rupee. Initially, the sourcing of cheaper Russian oil after the Ukraine war began in February was defended by the Indian government as being negligible quantities. According to the external affairs minister, the country’s total purchases for a month were less than what Europe does in an afternoon. In March, Russian oil purchases were 203,000 barrels per day (bpd) or 4% of India’s daily consumption of 5.15 million bpd. But they ballooned to 682,000 bpd in April-June sharply up from 22,500 bpd a year earlier according to Reuters. In June alone, they rose to 950,000 bpd or 18% of its daily requirement. Paying for such imports in the local currency unit would obviously be a big relief for the country.
The big question is what can be done to push the global acceptance of the rupee to settle India’s trade transactions, including with Russia. Interestingly, the dirham has been chosen as a unit to settle the latter’s oil transactions with India although the rupee is globally traded more, according to the Bank of International Settlements’ triennial central bank survey of foreign exchange turnover. The profile of the rupee is naturally bound to grow in tandem with the country’s rise in global trade. Although India’s exports of goods and services are growing rapidly, they currently account for only 2.4% of global exports of goods and services. More critical mass is necessary for internationalising the rupee. India is also talking to the UAE, Indonesia, and Sri Lanka to settle trade in domestic currencies. As indicated in RBI’s payments vision for 2025, the rupee’s inclusion in the continuous linked settlement initiative, which provides protection for cross-currency settlement in 18 currencies, can help. This should be taken up in right earnest as the rupee has a larger share in global forex turnover than many of these currencies. A mechanism for rupee settlement through CLS Bank will boost its acceptance in the global trade community.