Context: First Rupee Payment for Oil to UAE: Recently, the Indian Oil Corporation (IOC) paid Indian rupees for the purchase of a million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC).
First Rupee Payment for Oil to UAE and India-UAE Agreement on Settle Trade in Rupees
- India signed an agreement with the UAE for a rupee settlement in July 2023.
- To boost the rupee’s role in cross-border payments, the Reserve Bank of India allowed more than a dozen banks to settle trades in rupees with 18 countries. This is seen as a step towards the Internationalisation of the Rupee.
- Three-pronged strategy of India: Buying from the cheapest available source, diversifying sources of supply and not breaching any international obligation like the price cap in the case of Russian oil.
About Internationalisation Of Rupee
- It is a process that involves increasing the use of the rupee in cross-border transactions – between residents in India and non-residents.
- It involves promoting the rupee for
- Import and export trade
- Current account transactions.
- Capital account transactions.
Internationalisation of Rupee: Benefits for India
- Reduced Import Bill: 85% of India’s Oil needs are met from Imports.
- Reduced dependency on the Dollar: The dollar accounts for 88.3% of global foreign exchange market turnover, followed by the euro, Japanese Yen and Pound Sterling; the rupee accounts for a mere 1.7%.
- Savings on foreign exchange transactions for Indian residents.
- Reduced foreign exchange exposure for Indian corporations.
- Reduction in dependence on foreign exchange reserves for balance of payment stability.
- Appreciation of currency value.
- Mitigation of exchange rate volatility.
What challenges does India face in the internationalisation of Rupee?
- Lack of international demand: The daily average share for the rupee in the global foreign exchange market is ~1.6%, while India’s share of global goods trade is ~2%.
- Parliamentary standing committee report stated that there were few takers for the Indian rupee.
- During FY 2022-23, no crude oil imports by oil PSUs were settled in Indian rupee.
- Full capital account convertibility is not permitted in India: It is driven by past fears of capital flight (outflow of capital from India due to monetary policies/lack of growth) and exchange rate volatility, given significant current and capital account deficits.
Continue Reading: Internationalisation Of Rupee
Way Forward
- Ensure Free convertibility of Rupee, with a goal of full convertibility by 2060.
- To give foreign investors and Indian trading partners additional rupee investment options, the RBI should work to create a more extensive and liquid rupee bond market.
- Indian importers and exporters should be encouraged to issue rupee invoices for their transactions.
- Currency swap agreements would further allow India to settle trade and investment transactions.
- Tax incentives to foreign businesses to utilise the rupee in operations in India would also help.
- The Tarapore Committees’ (in 1997 and 2006) recommendations:–
- A push to reduce fiscal deficits lower than 3.5%,
- A reduction in gross inflation rate to 3%-5%, and
- A reduction in gross banking non-performing assets to less than 5%.
News Source: Financial Express
December 26, 2023
