India Makes Its 1st-Ever Rupee Payment For Crude Oil Purchase From UAE

Utkarsh Classes Last Updated 28-12-2023

India Makes Its 1st-Ever Rupee Payment For Crude Oil Purchase From UAE

International news 4 min read

India, the world's third largest energy consumer, has made its first payment in rupees for crude oil purchased from the United Arab Emirates (UAE). This is a historic step taken by India to promote the Indian currency at the global level.

This step by India will not only help diversify oil suppliers but will also reduce transaction costs. Also, India's effort will be helpful in establishing the rupee as a viable trade settlement currency.

Reserve Bank of India (RBI) consent:

This initiative was taken under the RBI decision on 11 July 2022, allowing importers to make payments in rupees and exporters to receive payments in local currency.

Earlier agreement was made for the deal:

India had in July formalised an agreement with the UAE to settle in rupees. After that, the Indian Oil Corporation (IOC) paid to buy 1 million barrels of crude oil in Indian rupees from Abu Dhabi National Oil Company (ADNOC). Additionally, Russian oil imports have also been settled in rupees. However, the oil imported from Russia is being paid in rupees, which Russia then invests in India.

India's multipronged strategy for oil imports:

India imports more than 85 percent of its oil requirements. In such a situation, the country has adopted a multipronged strategy.
There is an emphasis on sourcing from the most cost-effective suppliers, diversifying supply sources and adhering to international obligations.
The nation's approach proved beneficial during the ramp-up of Russian oil imports, saving billions of dollars.

Main reasons for India's payment in rupees:

The RBI has allowed many international banks to trade in the rupee in the last three years in its effort to promote the use of the rupee in cross-border payments.
RBI has entered into rupee trading agreements with 22 countries, aiming to globalise the circulation of Indian currency and decrease reliance on the US dollar.
With this, the Indian economy will be less affected by the decline in global currency.
The practice of settling oil transactions in dollars has been ongoing since the 1970s. Which the United States has been promoting under the petro-dollar.

India's dependence on oil imports:

In the financial year 2022-23 (April 2022 to March 2023), India spent $157.5 billion on importing 232.7 million tonnes of crude oil.
Major suppliers to India include Iraq, Saudi Arabia, Russia and the United Arab Emirates. In which West Asia contributes 58 percent to the total supply. Less than 15 percent of the demand is met by domestic supply.
However, now this equation has changed because currently it imports the maximum amount of oil from Russia.