India’s Rising Russian Oil Imports Making Rupee Settlement Mechanism Futile: Report

In July last year, the RBI announced the mechanism to settle overseas trade in rupees. The source also said that no payment has been initiated because Russian banks do not want excess rupee piling up

India’s Import of Russian oil has reached a new high. However, a Bloomberg report says that this has widened India’s trade deficit with Russia and impacted the RBI’s newly unveiled rupee trade mechanism. The report quotes people familiar with the matter saying the gap between their exports and imports is rising and that’s making the local currency payment mechanism futile. 

In July last year, RBI announced the mechanism to settle overseas trade in rupees. The source also said that no payment has been initiated because Russian banks do not want excess rupee piling up. Adding that till now the mechanism is largely limited to payments for the import of defense equipment. 

In December, India received 1.2 million barrels of crude from Russia every day, making it the biggest supplier of crude oil to India. Import of other goods like sunflower oil and fertilizers is also rising. According to the report, compared to 2021 in eight months to November India’s imports from Russia have increased by more than 400 per cent while export fell 14 per cent. 

Russian and Indian officials met last month to discuss plans to enhance India’s export to Russia in areas such as electronics so that the rupee trade mechanism can be brought back on track, the report said. 

Russia's conflict with Ukraine prompted US-led sanctions and in turn, drove India to increase its purchases of oil from Moscow in order to reduce its import bill amid rising commodity prices. The rupee trade settlement initiative was also seen as one of the byproducts of this geopolitical crisis. 

The rupee has fallen the most against the dollar among emerging Asian currencies in the last year. According to the report, the slow progress of the rupee settlement mechanism can add to the woes as India is counting on the internationalisation of the rupee to lower dollar demand and make its economy less vulnerable to global shocks.

It was earlier reported that Indian oil refineries are using United Arab Emirates dirham to pay for some shipments of Russian crude as they navigate Western sanctions.

Director General and Chief Executive Officer of the Federation of Indian Export Organisations, Ajay Sahai said, "As far as we know, there has been no transaction in Indian rupees so far."