The Indian Oil Ministry recently acknowledged that the country’s push to pay for oil with rupees has failed because suppliers are not sure if they will be able to repatriate their funds. The decision is intended to help diminish India’s reliance on the U.S. dollar when settling its cross-border obligations.
High Transactional Costs of Converting Rupees
The Indian oil ministry recently informed a standing committee of parliament that the country’s attempt to have oil producers accept payment in the local currency has failed. The ministry cites the perceived high cost of converting the rupee to other major currencies as one of the reasons for the policy’s failure.
The oil suppliers, including the United Arab Emirates’ ADNOC, have also highlighted possible challenges that may arise when repatriating the generated revenues, the ministry added.
According to a report in the Economic Times, some oil producers believe the rupee’s weaknesses versus the U.S. dollar make it a less-than-ideal payment method.
“During FY 2022-23, no crude oil imports by oil PSUs were settled in [the] Indian rupee. Crude oil suppliers (including UAE’s ADNOC) continue to express their concern on the repatriation of funds in the preferred currency and also highlighted high transactional costs associated with conversion of funds along with exchange fluctuation risks,” the country’s oil ministry said.
The report also added that the Indian Oil Company (IOC) paid a premium over and above the prevailing price, illustrating the extent of India’s de-dollarization failure. Furthermore, the country’s oil ministry stated that the Indian conglomerate Reliance Industries Ltd and oil public sector undertakings (PSUs) still have no agreement to pay in rupees with any supplier.
Since July 11, 2022, the Reserve Bank of India (RBI) has permitted oil importers to pay with rupees and exporters to be paid in rupees. The decision is intended to help diminish India’s reliance on the U.S. dollar when settling its cross-border obligations. India’s regional rival China has already established agreements with some oil-producing countries that allow it to pay via its currency, the yuan.
Despite India’s failed goal of paying for oil with rupees, its de-dollarization policy has still achieved some success in certain non-oil trade transactions.
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