The world economy is passing through a very uncertain and volatile global trading environment. This has unleashed supply-chain disruptions with domino effects, leading to catastrophic consequences for the world economy. India is not cushioned from these developments.
To deal with these ever-proliferating and interconnected episodes of economic disruption, India has pursued a calibrated strategy of protecting “national interests”.
A series of economic sanctions on Russia by the developed world has created severe supply-chain disruptions in energy products, ultimately contributing to higher energy prices and creating inflationary pressure on the world economy. Recognising this problem, the Reserve Bank of India has allowed invoicing, settlement and fund transfer in local currency by opening a ‘special Vostro account’ with the bank(s) of corresponding trade partner(s).
India has successfully leveraged Russia for securing cost-effective supplies of crude oil, natural gas, coal, fertilisers and other essential resources. Taking this journey forward, India is working with Saudi Arabia on settling trade in local currency (rupee-riyal) and also with Bangladesh (rupee-taka) in the context of the falling forex reserves of that country.
With the changing global energy dynamics due to economic sanctions, energy security has become an utmost priority for oil-importing countries such as India.
India’s decision to promote trade transactions in rupees will not only help its trade partners bypass economic sanctions but also provide an opportunity for India to explore the options to promote its currency for international trade transactions.
It is an opportune time for India to take this journey forward, from the transactional de-dollarisation or trading in local currencies, to the next level. One way of doing so is to negotiate future oil contracts is in rupee — that is, petro-rupee. China and Saudi Arabia have formalised the energy trade in petro-yuan.
Similarly, India, being the third largest energy buyer in the world, has good bargaining power to propose petro-rupee for energy trade. With growing economic size, India’s energy demand will grow manifold and the country should leverage it as a bargaining chip to negotiate rupee contracts with suppliers like Iraq, Saudi Arabia, Russia, the UAE and Nigeria.
All these leading suppliers are looking at India, which is expected to be the major driver of future growth in oil demand, as the oil consumption in Western countries is flat or declining. The other suppliers like Kuwait, Indonesia, Oman and Qatar can be courted in the next stage as the Indian energy market grows even larger.
For petro-rupee trade to materialise, an enabling ecosystem needs to be developed. The commodity exchanges in India can play a vital role in bringing the buyers, sellers and speculators at one place, thus helping both producers and consumers explore the actual price and hedge their risks.
This can be easily done with digital trade as physical trade is a thing of the past. In the short run, Indian commodity exchanges can introduce the exchange trade funds for oil contract, thus engaging both local as well as international traders in the initial phase. It is similar to bringing an investor to the equity market via a systematic investment plan of a mutual fund.
In the long run, the commodity exchanges can introduce other forms of derivative instruments — for instance, long-dated futures and forward contracts for larger traders and a choice of ‘options’ for small traders. This will develop an entire business ecosystem of exploring the fair energy prices of oil and gas which are reflective of ‘India’s trade basket’.
With large storage capacity being created both by large suppliers (Aramco, ADNOC and now Rosneft) and the government of India, it enables a facilitative value-chain for trade in Indian rupee.
The weaponisation of financial instruments and commodities have led to mistrust of unprecedented degree at the global level. The geo-economic events of the recent past have not only shaken us all, but stirred our mind to think far beyond. In the evolving geo-economic landscape, India should not remain merely a ‘rule-taker’ but should evolve into a ‘rule-maker’.
For instance, with its rising economic clout, Indian oil companies, gradually and in a foreseeable future, should explore the price discovery of oil from Indian exchanges not from the Western benchmarks like Brent and West Texas Intermediate (WTI).
China already has established a new exchange in Shanghai, the International Energy Exchange (IEE), which has attracted a large number of speculators from financial markets.
India with its transparent and rule-based market system, rising energy imports with ever-growing demand, and cordial and harmonious relations with leading oil suppliers is better placed to emerge as an Asian exchange for price discovery of oil. This will create a roadmap for petro-rupee trade, which has become a need for India with the weaponisation of almost all financial instruments.
Lastly, India’s quest for trade in local currencies and ultimately to transactional and financial de-dollarisation is not triggered by global geo-economic ambitions but by the web of economic sanctions. Also, it is aimed at creating a multi-polar, inclusive and sustainable global order both for developing and developed countries. India, in order to protect its national interest, should explore all avenues of trading in local currencies and even beyond.
Ram is Professor at IIFT, New Delhi, and Surendar Singh is Associate Professor at FORE School of Management, New Delhi. Views are personal