India’s policy efforts to settle oil trade through INR payments have failed to generate much momentum due to a rising trade deficit and currency volatility. These efforts have resulted in pilots and policy tweaks, but market conditions do not favour INR settlements, Abhijit Mukhopadhyay, senior economist at Chintan Research Foundation, told EnterpriseAM.

The context: The Special INR Vostro Account (SRVA) framework, launched in 2022 by the Reserve Bank of India (RBI) — initially to facilitate trade with sanction-hit Russia — has struggled to gain traction, with most transactions still routed in UAE currency (AED).

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Deficit tells the full story: India has run a consistent trade deficit with the UAE since FY 2020, currently at around USD 26-27 bn. “If settlement is done in INR, the UAE will accumulate a huge amount of INR every year. But what do they do with that stash? Practically, nothing much,” Mukhopadhyay said.

“The willingness to invest in Indian assets cannot be forced, of course,” he adds. In theory, Emirati banks maintain SRVA accounts with authorized Indian dealers to settle INR-AED trade, allowing the surplus currency to be deployed into Indian assets. However, in praxis, the scale does not match. In FY24, the UAE’s FDI inflows into India stood at USD 2.9 bn in, a fraction of the annual imports of oil and precious stones worth over USD 24 bn.

India’s Petroleum Ministry recently acknowledged that crude suppliers remain reluctant to accept INR payments because imports far outweigh exports, as per Mint.

“Economic might will decide whether the INR becomes internationally accepted,” Mukhopadhyay said, adding that without global trust, no amount of action by the RBI could make the INR a preferred settlement currency.

The pilot was a PR success. The RBI and the Central Bank of the UAE signed an MoU in 2023 to promote INR-AED trade. When Indian Oil Corporation (IOCL) paid Abu Dhabi National Oil Company (Adnoc) for 1 mn barrels of crude in INR in August that year, it was hailed as a breakthrough. But the INR-settled volumes continue to remain negligible as India’s total crude imports are mainly settled in USD, according to Mukhopadyay.

A December 2023 parliamentary review confirmed that no state-owned oil imports were settled in INR during FY 2022-23 due to supplier pushback. Suppliers like Adnoc cited repatriation risks and high conversion costs. Consequently, buyers like Indian Oil Corporation found INR settlements commercially unviable, as suppliers passed on these transaction costs, inflating import bills.

Local-currency trade is feasible only when counterparties trust the currency as a valued medium of exchange. “International recognition is key,” Mukhopadhyay notes, citing sustained GDP growth, export competitiveness, and currency stability as prerequisites. Depreciation risk also remains a deterrent, particularly for commodity exporters with thin margins.

Despite the buzz around cross-border payment platforms, Mukhopadhyay says it is not a payment problem. “It is immaterial whether payments are made by traditional banks or fintech architectures,” as how the money moves does not fix the underlying trade deficit or currency risk.

Long story short, oil suppliers have zero incentive to ditch the AED or greenback until India’s end-products become “must-haves” for the global market, including the UAE, Mukhopadhyay said.

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