The global economy is going through a highly uncertain and volatile global trading environment. This triggered supply chain disruptions with domino effects, leading to catastrophic consequences for the global economy. India is not immune to these developments.
To deal with these ever-increasing and interconnected episodes of economic disruption, India has pursued a calibrated strategy of safeguarding “national interests”.
A series of economic sanctions against Russia by the developed world have created serious disruptions in the supply chain of energy products, ultimately contributing to higher energy prices and creating inflationary pressure on the global economy. Recognizing this problem, the Reserve Bank of India has permitted local currency billing, settlement and funds transfer by opening a “Vostro Special Account” with the bank(s) of the corresponding trading partner(s).
India has successfully leveraged Russia to secure profitable supplies of crude oil, natural gas, coal, fertilizers and other essential resources. Moving forward, India is working with Saudi Arabia on local currency (rupee-riyal) trade settlement and also with Bangladesh (rupee-taka) amid declining foreign exchange reserves of this country.
With changing global energy dynamics due to economic sanctions, energy security has become a top priority for oil-importing countries like India.
India’s decision to promote trade transactions in rupees will not only help its trading partners circumvent economic sanctions, but also provide India with an opportunity to explore options for promoting its currency for international trade transactions. .
Now is an opportune time for India to take this journey, from transactional de-dollarization or local currency trade, to the next level. One way to do this is to trade future oil contracts in rupees, i.e. petro-rupees. China and Saudi Arabia have formalized energy trading in petro-yuan.
Similarly, India, being the third largest buyer of energy in the world, has good bargaining power to offer petro-rupees for energy trading. With growing economic size, India’s energy demand will increase and the country is expected to use it as a bargaining chip to negotiate rupee contracts with suppliers like Iraq, Saudi Arabia, Russia, United Arab Emirates and Nigeria.
All of these major suppliers are looking to India, which is expected to be the main driver of future oil demand growth, as oil consumption in Western countries is stable or declining. The other suppliers like Kuwait, Indonesia, Oman and Qatar can be wooed to the next step as the Indian energy market develops even further.
For the petro-rupee trade to materialize, a favorable ecosystem must be developed. Commodity exchanges in India can play a vital role in bringing buyers, sellers and speculators together in one place, helping producers and consumers explore the true price and hedge their risk.
This can be easily done with digital commerce, as physical commerce is a thing of the past. In the short term, Indian commodity exchanges can introduce the swap trading funds for the oil contract, thereby engaging local and international traders in the initial phase. It is like bringing an investor to the stock market through a systematic mutual fund investment plan.
In the long term, commodity exchanges may introduce other forms of derivative instruments — for example, futures and long-term contracts for large traders and a choice of “options” for small traders. This will develop a whole trading ecosystem of exploring fair oil and gas energy prices that reflect the “India trading basket”.
With a large storage capacity created by both major suppliers (Aramco, ADNOC and now Rosneft) and the Indian government, this allows for an easing value chain for Indian Rupee trading.
The militarization of financial instruments and raw materials has led to an unprecedented degree of distrust worldwide. The geo-economic events of the recent past have not only shaken us all but also challenged our minds to think far beyond. In the changing geo-economic landscape, India should not simply remain a ‘rule taker’ but should evolve into a ‘rule maker’.
For example, with its growing economic weight, Indian oil companies should, gradually and for the foreseeable future, explore the discovery of oil prices on Indian exchanges and not on Western benchmarks like Brent and West Texas Intermediate (WTI). .
China has already established a new stock exchange in Shanghai, the International Energy Exchange (IEE), which has attracted a large number of financial market speculators.
India, with its transparent and rules-based market system, growing energy imports with ever-increasing demand, and cordial and harmonious relations with major oil suppliers, is better placed to become an Asian stock exchange for discovery of oil prices. This will create a roadmap for the petro-rupee trade, which has become a necessity for India with the militarization of almost all financial instruments.
Finally, India’s quest for trade in local currencies and, ultimately, towards transactional and financial dedollarization is not triggered by global geo-economic ambitions but by a network of economic sanctions. Furthermore, it aims to create a multipolar, inclusive and sustainable world order for both developing and developed countries. India, in order to protect its national interest, should explore all avenues of trade 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
September 25, 2022