The currency question: India needs to push for the internationalisation of the rupee; here's why

Russia’s invasion of Ukraine sparked a new financial battle as western sanctions have compelled Moscow and its crude oil customers to look for alternatives to the dollar for payments. Consequently, some Indian refiners recently paid in the Chinese yuan for the commodity.

Reports suggest that state-run Indian Oil Corporation and a few other private oil refiners are now partly paying in the Chinese currency for Russian oil due to the lack of viable non-dollar payment options.

In the past year, Russian supplies have risen to account for 40-50 per cent of India’s crude oil imports, from just 2 per cent before the Ukraine war started. In fact, India’s trade deficit with Russia widened to $43.06 billion in FY23 as crude oil imports from the latter rose to $31.02 billion in FY23 from $2.47 billion in FY22. Even as overdue payments to Russian suppliers mount, a rupee-based settlement mechanism has not materialised. But discussions between New Delhi and Moscow are still underway. While several Russian banks have opened Vostro accounts (third-party custodial accounts in which one bank manages foreign currency funds for another), actual transactions are yet to take off. Payments through other currencies such as the dirham are also being explored, sources indicate.

Energy analyst Narendra Taneja says payments through yuan are a stopgap measure, while Russia and India negotiate a longer-term solution. “I don’t see this turning into a regular thing,” he says. “Even if there are some payments in yuan, it is beneficial to us,” says Ashwani Mahajan, National Co-Convener of Swadeshi Jagran Manch, that promotes national self-reliance, adding that the purchase of discounted Russian crude has helped India keep energy inflation under control.

For India, the use of the yuan as an international currency may not be sustainable as it is heavily controlled by the Chinese government. With its growing economic clout, India is also trying to internationalise the rupee. Mahajan stresses the importance of expanding trade in rupees, which can contribute to de-dollarisation. In the long term, he says, “there is a need for a more equitable balance of payments with Russia”.

Separately, the Reserve Bank of India’s Inter-Departmental Group has proposed a road map for rupee internalisation that includes liberalising the capital account, increasing foreign use of the rupee and strengthening the financial markets. But experts believe it will take time and depend on the implementation of the group’s suggestions. “The report is just the beginning,” says

Devendra Kumar Pant, Chief Economist and Head (Public Finance), India Ratings. “It can happen only if the share of an economy increases substantially in the global GDP and global trade.”

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