India's rupee trade plan taking a hit as Russian oil imports zoom: Report

India’s rising oil imports from Russia have made rupee trade rather futile, according to a Bloomberg report. The widened trade deficit with Moscow has taken a toll on the rupee trade plan, it said.

The gap between India’s exports and imports is rising, making the Indian currency payment mechanism futile, said the report quoting sources. “No payment has been initiated because Russian banks do not want excess rupee piling up,” it added.

India’s imports from Russia in the eight months up to November 2022 were around 16 times its exports to Russia. 

Ukraine war

The idea of rupee trade was triggered by the Russia-Ukraine conflict, following which the US imposed sanctions on Russia. India increased its purchases of cheap oil from Russia with a keen eye on its own rising import bills, said Bloomberg.

The Indian rupee, already battered over the years, could suffer additionally from slow progress in rupee trade with Russia. The Centre has been banking on ‘internationalisation of the rupee’ to trim dollar demand. 

Russian and Indian officials met in January to look at ways to enhance exports to Russia. The focus was on areas like electronics, and the idea was to revive the rupee trade mechanism, said the report.

Protecting the rupee

Last month, the Economic Survey had said promoting international trade in the domestic currency will help in protecting the rupee from volatility and reduce cost of doing business in the global markets. It suggested that it could assist Indian exporters in getting advance payments in rupee from overseas clients and in the longer term promote the domestic currency as an international currency once the rupee settlement mechanism gains traction. 

In July 2022, the Reserve Bank of India issued a circular permitting an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian rupee to promote the growth of global trade with emphasis on exports from India and to support the increasing interest in the global trading community in rupee as an international currency. 

The framework involves invoicing of exports and imports in rupee, market-determined exchange rates between the currencies of the trading partner countries, and settlement through special rupee Vostro accounts opened with authorised dealer banks in India. International settlement in rupee acquires significance against the backdrop of the US Federal Reserve aggressively hiking the policy rates and its hawkish stand.

With agency inputs