India pays in rupee for oil imported from UAE, for the first time

India’s bid to trade in local currency, the rupee, seems to have finally found traction. The United Arab Emirates (UAE) has accepted payment for crude oil in rupee, for the first time.

India had, in July this year, entered into an agreement with the UAE for rupee settlements for oil trade. Under the agreement, state-run Indian Oil Corporation (IOC) has been allowed to make rupee payments for the purchase of one million barrels of crude oil from Abu Dhabi National Oil Company (Adnoc).

However, no oil company from India has signed any contract with foreign crude oil suppliers to make purchases in Indian currency, according to the ministry of petroleum and natural gas.

Oil imports by IOC and other Indian oil companies were settled mostly in hard currency earlier, including the previous financial year (2022-23), the ministry stated.

"During FY 2022-23, no crude oil imports by oil PSUs were settled in 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 the conversion of funds along with exchange fluctuation risks," the oil ministry told the parliamentary department related standing committee.

While the Reserve Bank of India has allowed the use of rupee for overseas payments, sellers are concerned about the repatriation of funds and high cost of transactions. The problem with the rupee is that it is not popular like the US dollar or euro or even the Chinese yuan, the ministry pointed out.

The dollar was promoted by the International Monetary Fund and the World Bank through their lending programmes, while China used its trade potential and its surplus funds to popularise the yuan.

The US currency, and the euro are currently the most widely accepted medium for international financial transactions

While India had a rupee trade arrangement with Russia and a few other countries, oil exporters have mostly shunned rupee trade as the currency cannot be easily repatriated. Russia, which offered to accept payment for oil in rupee at the onset of the US-led sanctions on the country, backtracked after it found the arrangement unviable. India was asked to make payments in the Chinese yuan as Russia had a larger trade relation with that country.

India, the world’s third-largest oil consumer, depends on imports for 85 per cent of its oil requirements. The country spent $157.5 billion on import of 232.7 million tonnes of crude oil in the 2022-233 financial year.