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India’s Efforts to De-Dollarize Oil Payments Hit a Roadblock

January 15, 2024 | by stockcoin.net

indias-efforts-to-de-dollarize-oil-payments-hit-a-roadblock

India’s efforts to de-dollarize oil payments have hit a roadblock as oil suppliers raise concerns about the repatriation of funds in rupees. The Indian Oil Ministry recently acknowledged that the country’s attempt to pay for oil with its local currency has failed due to suppliers’ uncertainty about converting and repatriating their funds. This decision was part of India’s strategy to reduce its reliance on the U.S. dollar for cross-border transactions. High transactional costs and the rupee’s weakness against the dollar were cited as reasons for the policy’s failure. Despite this setback, India’s de-dollarization policy has achieved some success in non-oil trade transactions.

Indias Efforts to De-Dollarize Oil Payments Hit a Roadblock

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High Transactional Costs of Converting Rupees

The Indian oil ministry recently acknowledged that the country’s attempt to pay for oil with rupees has failed. One of the reasons cited for the failure is the perceived high cost of converting the rupee to other major currencies. The oil suppliers, including the United Arab Emirates’ ADNOC, have also expressed concerns about the challenges they may face when repatriating the generated revenues. Some oil producers believe that the weaknesses of the rupee compared to the U.S. dollar make it an unfavorable payment method. High transactional costs associated with the conversion of funds, as well as the risks related to exchange rate fluctuations, further compound the challenges posed by converting rupees.

Premium Payments by Indian Oil Company (IOC)

The Indian Oil Company (IOC) has been paying a premium over and above the prevailing price, indicating the failure of India’s de-dollarization efforts. The country’s oil ministry has highlighted that the Indian conglomerate Reliance Industries Ltd and oil public sector undertakings (PSUs) still do not have any agreement to pay in rupees with any supplier. This lack of agreement further emphasizes the difficulties faced by the country in achieving its de-dollarization goals.

Reserve Bank of India’s Permission to Use Rupees

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 objective behind this decision is to reduce India’s reliance on the U.S. dollar when settling its cross-border obligations. China, India’s regional rival, has already established agreements with some oil-producing countries that allow it to pay in its currency, the yuan. By allowing the use of rupees for transactions, India aims to follow a similar path to reduce its dependence on the U.S. dollar.

Limited Success in Non-Oil Trade Transactions

While the attempt to pay for oil with rupees has encountered significant challenges, India’s de-dollarization policy has still achieved some success in certain non-oil trade transactions. The details of these specific successes in non-oil trade have not been provided in the available information. However, it indicates that there have been achievements in diversifying payment methods and reducing reliance on the U.S. dollar in certain areas of trade.

Oil Suppliers’ Concerns on Repatriation of Funds

Oil suppliers, including ADNOC from the United Arab Emirates, have expressed concerns about the repatriation of funds in their preferred currency. This concern further highlights the challenges faced by Indian oil importers in ensuring the smooth repatriation of generated revenues. The high transactional costs associated with the conversion of funds, along with the risks related to exchange rate fluctuations, contribute to the complexities of repatriation.

Transactional Costs and Exchange Fluctuation Risks

Converting rupees to other major currencies involves high transactional costs, which have been cited as a reason for the failure of India’s attempt to pay for oil with rupees. These costs contribute to the perceived high cost of converting rupees and make it less attractive for oil suppliers to accept payments in the Indian currency. Additionally, exchange rate fluctuations pose risks when converting funds, further complicating the transaction process.

Reliance on the US Dollar in Cross-Border Obligations

India’s reliance on the U.S. dollar for settling its cross-border obligations is a significant concern that the de-dollarization policy aims to address. Currently, India heavily depends on the U.S. dollar, which poses risks in terms of exchange rate fluctuations and exposure to the policies and dynamics of the U.S. economy. By reducing dependence on the U.S. dollar, India aims to diversify its currency sources and mitigate these risks.

Impact on Indian Oil Sector

The failure of India’s de-dollarization push has consequences for the Indian oil industry. The inability to pay for oil with rupees and the challenges associated with converting and repatriating funds in the preferred currency of oil suppliers create uncertainties and potential setbacks for the industry. Additionally, the lack of agreements between Indian conglomerate Reliance Industries Ltd and oil public sector undertakings (PSUs) further highlights the challenges faced by the industry in adopting a de-dollarization approach.

The Importance of De-Dollarization

India’s de-dollarization efforts are motivated by the desire to reduce reliance on the U.S. dollar and diversify its currency sources. The aim is to mitigate risks associated with exchange rate fluctuations, exposure to U.S. economic policies, and high transactional costs. However, the challenges encountered in converting rupees and the concerns expressed by oil suppliers highlight the importance of carefully planning and implementing de-dollarization strategies to ensure successful outcomes.

Future Prospects and Strategies

Assessing the future prospects for de-dollarization requires careful consideration of the challenges encountered and the lessons learned from other countries’ experiences. Strategies to overcome roadblocks may include addressing the concerns of oil suppliers, reducing transactional costs, and mitigating risks related to exchange rate fluctuations. India can also learn from China’s currency agreements with oil-producing countries and their success in reducing dependence on the U.S. dollar. Implementing a comprehensive and well-thought-out de-dollarization strategy will be crucial for achieving India’s objectives in the future.

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