India’s love for cheap oil from Russia is hurting the country’s rupee trade plan. Data based on figures from the trade ministry showed India’s imports from Russia in the eight months leading up to November were about 16 times greater than its exports.
A Bloomberg report quoting sources showed India’s push for a rupee payment mechanism is becoming futile due to the growing trade gap with Russia. The sources said Russian banks had not initiated any payments in the Indian currency yet as they do not want a pile-up of rupees.
Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organisations told Bloomberg, “as far as we know, there has been no transaction in Indian rupees so far.”
That comes when India promotes rupee trade with several countries, including Sri Lanka, Bangladesh, and South Africa.
The Rupee trade mechanism began to take shape due to Russia’s conflict with Ukraine, which prompted US-led sanctions and drove India to increase its purchases of inexpensive oil from Moscow to reduce its import bill in the face of rising commodity prices.
The system served as a model for creating such agreements with other countries like Sri Lanka and Mauritius.
What a slow rupee trade with Russia can do is weigh further on the Indian currency, which has already weakened the most among emerging Asian currencies over the past year.
The rupee has repeatedly breached several record lows against the dollar over the past year.
The Indian currency was changing hands at around 74 per dollar before the Ukraine crisis started late in February last year but has since fallen to multiple all-time lows, breaching the 83 per dollar level for the first time ever.
The currency has been trading in a narrow range but closer to 83 per dollar for a few months. India is relying on the internationalisation of the rupee to lower dollar demand and protect the economy from external shocks.
Last month, officials from India and Russia met to discuss methods to increase exports to Moscow in industries like electronics. That was to restart the rupee trade mechanism. But traders are considering alternative modes of payment.
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The Reserve Bank of India announced the settlement of international trade in rupees plan in July. But seven months since, the system is mostly restricted to payments for the import of defence equipment.
India refiners, too, prefer to pay in the United Arab Emirates dirham, which is pegged to the dollar, as payment in roubles is also difficult because there is no set rate for the Russian currency.
Reliance Industries Ltd., the largest firm in India by market value, and BPCL are two Indian refiners that use dirhams to pay for some shipments of Russian petroleum to avoid Western sanctions.
Russia has emerged as India’s top crude oil supplier, overtaking Saudi Arabia and Iraq.
Even though petroleum remains the main commodity traded between the two countries, imports of goods like fertiliser and sunflower oil have increased recently.
India’s imports from Russia increased by more than 400 per cent in the eight months leading up to November compared to the same period last year.
But exports decreased by 14 per cent during the same period, indicating that the government’s efforts to increase outbound shipments have not been very successful.
(With inputs from agencies)