Oil import against rupee a damp squib, no takers for the route

New Delhi: India's push for rupee to be used to pay for import of crude oil has not found any takers as suppliers have expressed concern on repatriation of funds and high transactional costs, the oil ministry told a parliamentary standing committee.

The default payment currency for all contracts for import of crude oil is US dollar as per the international trade practice. However, in a bid to internationalise the Indian currency, the Reserve Bank of India on July 11, 2022 allowed importers to pay with rupees and exporters be paid in rupee.

While there has been some success with non-oil trade with a select few countries, rupee continues to be shunned by oil exporters.

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

The ministry, whose subimissions are part of the committee's report which was tabled in Parliament last week, said Indian Oil Corporation (IOC) has informed that it incurred high transaction costs as crude oil suppliers pass on the additional transactional costs to IOC."

The RBI, it said, had last year permitted opening of rupee vostro accounts in the partner trading country. Under this mechanism, Indian importers undertaking imports through this mechanism shall make payment in Indian rupee which shall be credited into the special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.

"Payments for crude oil can be made in Indian rupee, subject to the suppliers' complying with regulatory guidelines in this regard," the ministry said. "Currently, Reliance Industries Ltd and oil PSUs do not have an agreement with any crude oil supplier to make purchases in Indian currency for supply of crude oil."

India is the world's third largest energy consumer. With its domestic production meeting less than 15 per cent of its needs, the country imports the remaining crude oil, which is converted to fuels such as petrol and diesel at refineries.

In the 2022-23 (April 2022 to March 2023) fiscal, India spent USD 157.5 billion on import of 232.7 million tonnes of crude oil. Iraq, Saudi Arabia, Russia, and UAE were its biggest suppliers. Of this, 141.2 million tonnes came from the Middle East, accounting for 58 per cent of all supplies.

In the current fiscal, India imported 152.6 million tonnes of crude oil between April and November for USD 113.4 billion.

"India's consumption would be about 5.5-5.6 million barrels per day. Out of that, we import about 4.6 million barrels per day, which is about 10 per cent of the overall oil trade in the world," the ministry told the committee.

On price volatility, the ministry said PSU oil firms are impacted by the volatility in prices of crude oil but only to the extent of fuel and loss.

"The prices of crude oil and refined petroleum products generally move in tandem with each other. Thus, it's the volatility in product cracks (price difference between that of product prices and benchmark crude oil), which impacts the refiners the most."

"To hedge against this volatility, oil companies has been hedging the various product cracks as and when the opportunity is presented in the forward market. All the hedge positions are undertaken through OTC (Over the Counter) market with registered international counterparties and details of the hedge is reported to authorised dealer bank on quarterly basis. Further, oil companies are also hedging their forex risk in line with their risk management policies," it added.