India is the world’s third-largest energy consumer, made significant move by conducting its first-ever payment in rupees for its crude oil purchased from UAE. It is part of India’s broader efforts to diversify oil suppliers, and establish rupee as a viable international trade settlement Currency
Payment in rupees for crude oil from UAE is as per agreement signed between two countries in July 2022 which aims to boost India’s efforts to cut transaction costs by eliminating dollar conversions.
It is one of the steps in Internationalisation of Rupee.
Internationalisation of rupee is a process that involves increasing use of local currency in cross-border transactions.

Significance of Internationalisation of rupee

Challenges in Internationalisation of rupee

Reduced autonomy over Monetary Policies.
May result in increased volatility in rupee’s exchange rate in initial stages.
India operates a partially convertible capital account, which allows limited rupee exchange.
The adoption of the rupee as a settlement currency faces resistance from major oil exporters.
Concerns about fund repatriation and high transactional costs have led to hesitancy among oil suppliers to embrace the Indian rupee.

In the financial year 2022-23 (April 2022 to March 2023), India spent a substantial $157.5 billion on importing 232.7 million tonnes of crude oil.
Key suppliers includes Iraq, Saudi Arabia, Russia, and the UAE, with West Asia contributing 58% of all supplies.
Despite efforts to enhance domestic supply, it still meets less than 15% of the overall demand.

In July 2022, RBI allowed trade settlement in rupees through Special Vostro Accounts.
Currency swaps agreement Sri Lanka, Maldives etc. to promote internationalisation of Rupee.
Allowing issuance of offshore Rupee denominated ‘masala’ bonds.