What Happened
- India is exploring local currency payment arrangements for crude oil imports from West Asian suppliers, as the surge in oil prices and the rupee's depreciation combine to strain the country's import finances.
- If such arrangements are successfully implemented, India could be paying for approximately 80% of its oil imports in non-dollar currencies — building on existing rupee settlements for Russian oil and the landmark rupee-for-UAE-oil precedent from 2023.
- The strategy carries a political risk: the Trump administration has already signalled it would view dollar-bypassing trade arrangements as grounds for retaliatory tariffs.
- The rupee has fallen to near-record lows against the dollar amid the West Asia conflict, FPI outflows, and elevated oil import costs, raising concerns about India's current account deficit widening significantly.
- Indian refiners are reportedly paying a $6–8 per barrel premium over ICE Brent benchmarks for Gulf crude that manages to transit the Strait of Hormuz, reflecting the risk premium attached to current supply.
- Discussions are ongoing about extending the Local Currency Settlement (LCS) mechanism — first used for UAE oil in December 2023 — to other Gulf suppliers.
Static Topic Bridges
Rupee Internationalisation and the Local Currency Settlement (LCS) Framework
Rupee internationalisation refers to the process of expanding the use of the Indian Rupee (INR) in international trade, investment, and financial transactions beyond India's borders, reducing reliance on hard currencies (primarily the US dollar) for cross-border settlements.
- The Reserve Bank of India (RBI) introduced a framework for International Trade Settlement in Indian Rupees in July 2022, primarily driven by the need to continue trading with sanctions-hit Russia.
- Under the framework, authorised banks in partner countries open Special Vostro Rupee Accounts (SVRAs) in India; Indian importers pay in rupees into these accounts.
- As of 2025, banks from over 22 countries have opened SVRAs, including Russia, UAE, Sri Lanka, Bangladesh, and several others.
- India's first-ever rupee payment for crude oil from the UAE was made in December 2023, following the Memorandum of Understanding signed during PM Modi's UAE visit in July 2023, establishing the Local Currency Settlement (LCS) System with the Reserve Bank of India and the UAE Central Bank.
- India-UAE bilateral trade was approximately $83.6 billion in FY 2023-24, making the UAE India's third-largest trading partner.
- The broader rupee internationalisation roadmap envisions India using INR for BRICS trade, regional connectivity payments (INSTC, Chabahar), and bilateral energy imports.
Connection to this news: The proposed extension of local currency oil payments to multiple West Asian suppliers follows directly from the RBI's LCS framework and the 2023 UAE precedent — but the scale of the ambition (80% of oil imports in non-dollar currencies) would represent a qualitative leap in India's de-dollarisation trajectory.
De-dollarisation: Global Trends and India's Cautious Approach
De-dollarisation refers to the process by which countries reduce their reliance on the US dollar in international trade, central bank reserves, and financial transactions. While not official Indian policy by name, India's actions — rupee trade settlement, currency swap agreements, and participation in alternative payment systems — reflect a pragmatic diversification of financial exposure.
- The US dollar currently constitutes approximately 58% of global foreign exchange reserves (down from ~71% in 2000) and is used in roughly 88% of global forex transactions (Bank for International Settlements, 2022).
- BRICS intra-trade in local currencies has grown significantly, with Russia-China trade now conducted largely in yuan and rubles; India-UAE in rupees and dirhams.
- India has Currency Swap Agreements with several countries: a $75 billion swap with Japan (SAARC framework), SAARC Currency Swap Facility (launched 2012, all 8 SAARC members), and bilateral arrangements with the Maldives, Sri Lanka, and others.
- External Affairs Minister Jaishankar has clarified that India does not pursue de-dollarisation as a policy objective — this is important context: India's moves are driven by sanctions evasion, bilateral convenience, and cost reduction, not ideological opposition to the dollar.
- The US has signalled through "secondary sanctions" and tariff threats that it considers dollar-bypass arrangements a provocation.
Connection to this news: India's exploration of local currency oil payments from West Asia is strategically motivated by the current crisis — but it must be calibrated carefully to avoid triggering US trade retaliation at a time when India is also negotiating a bilateral trade deal with Washington.
India's Current Account Deficit (CAD) and Oil Import Bill
The Current Account Deficit (CAD) measures the gap between a country's total imports of goods, services, and transfers and its total exports. For India, crude oil imports are the single largest component of the trade deficit, making oil prices a primary determinant of external sector health.
- India imports approximately 5 million barrels of crude oil per day, with the import bill in FY 2023-24 estimated at approximately $132 billion.
- Every $10 increase in crude oil prices adds approximately $12–15 billion to India's annual oil import bill.
- India's CAD widened to approximately 1.2% of GDP in FY 2024-25; sustained high oil above $80 per barrel risks pushing it above 2%, the threshold typically seen as a stress indicator.
- India's forex reserves were approximately $640–660 billion (early 2026), providing import cover of about 10–11 months — a significant buffer, but one that gets consumed faster under prolonged high oil prices.
- Rupee depreciation amplifies the impact of oil price rises: when the rupee falls against the dollar, India pays more in rupee terms for the same dollar-priced barrel.
- The "twin deficit" risk (CAD + fiscal deficit both widening) is a structural vulnerability for India during commodity price shocks.
Connection to this news: The current confluence of a rising oil price, a depreciating rupee, and supply chain disruptions creates a textbook external sector stress scenario for India — local currency oil payments would directly reduce dollar outflows, easing pressure on reserves and the current account.
Key Facts & Data
- Potential share of India's oil imports in non-dollar currencies if West Asian deals complete: approximately 80%.
- India-UAE first rupee oil payment: December 2023.
- India-UAE LCS MoU signed: July 2023 (during PM Modi's UAE visit).
- India-UAE bilateral trade: approximately $83.6 billion (FY 2023-24).
- Current account of India: approximately 1.2% of GDP deficit (FY 2024-25).
- Each $10 crude price rise: adds $12–15 billion to India's import bill annually.
- Gulf crude risk premium above ICE Brent: approximately $6–8 per barrel amid Hormuz disruptions.
- RBI Rupee Settlement Framework: introduced July 2022.
- Countries with SVRA accounts for rupee trade: over 22 as of 2025.