India warns Washington of the impact of customs duties on Russian oil purchases

India has warned Washington that new measures to impose tariffs on purchases of Russian oil could affect bilateral relations, India's foreign ministry said on Thursday, hours after the United States took a new step to penalize buyers of such shipments.

Earlier today, the US House of Representatives approved a comprehensive draft law on sanctions and customs duties aimed at increasing economic pressure on Russia due to its invasion of Ukraine, according to Reuters.

The bill, which has now been sent to President Donald Trump to sign into law, gives the president the power to impose heavy tariffs of up to 100 percent on China, India and other countries, to force them to reduce their dependence on Russian energy.

The Indian Ministry of Foreign Affairs said that it was informed of the passage of the draft law, adding that New Delhi had discussed this issue with various concerned American parties in recent months, and had “clearly made clear” the potential repercussions on bilateral relations and the global energy market.

The ministry affirmed, in a statement, that New Delhi remains “fully committed” to ensuring energy security for its people, and will continue to obtain supplies from various vendors according to market dynamics.

The ministry added, “The Indian side also made clear its intention to take all necessary measures to protect its commercial and economic interests,” noting that the government will work closely with commercial and industrial bodies to deal with the repercussions of this legislation.

India, the world's third-largest oil importer, is one of the largest buyers of Russian oil, as these purchases are seen as helping Moscow strengthen its budget since it launched its comprehensive invasion of Ukraine in 2022 and was subjected to widespread Western sanctions.

New Delhi has repeatedly sought to resist pressure to reduce its oil trade with Russia, stressing that its large population and large economy require safe, reliable and affordable energy supplies.

According to sources familiar with the matter, Indian refiners have arranged oil deals for the months of September and October that include shipments of Russian oil.

Two sources in the refining sector said that they want the government to raise this issue for discussion with the American authorities, given that oil prices may rise sharply if Trump decides to impose new customs duties.

The two sources added that oil supplies have decreased significantly due to the war in the Middle East, and that reducing Russian supplies will severely affect the profits of refining companies, which already sell fuel at prices below market prices.

The two sources added that refiners want the government to seek some facilities, instead of imposing 100 percent customs duties, allowing them to liquidate existing transactions and set a quota for India to buy Russian oil.

Complexity of trade talks

Indian analysts believe that the possibility of imposing new US tariffs on Indian exports may complicate the ongoing trade negotiations between India and the United States, and may delay or make it more difficult to reach a trade agreement.

“Washington may use the threat of tariffs to pressure India to reduce its purchases of Russian oil and accept a highly unequal trade deal,” said Ajay Srivastava, founder of the New Delhi-based think tank the Global Trade Research Initiative and a former trade official.

After months of talks, India and the United States have yet to reach a consensus on a trade deal, with New Delhi insisting on getting a better deal.

Indian Commerce Minister Piyush Goyal is scheduled to travel to the United States to attend the G20 trade ministers' meeting later this month, where he is expected to hold a bilateral meeting with US Trade Representative Jamieson Greer to discuss the next steps related to the deal.

South Korean Foreign Minister Cho Hyun said on Thursday that the announcement of Seoul's investment plans in the United States, within the framework of its trade agreement with Washington, has been postponed until some procedural issues are clarified, without going into further details.

Chu made these statements at the airport before leaving for the United States. He is scheduled to meet US Secretary of State Marco Rubio for talks on Friday.

This week, the South Korean government postponed a scheduled briefing to a parliamentary committee on its investment plans, and set a new tentative date for it on September 22, according to an informed official and media reports.

Lawmakers describe this parliamentary briefing as one of the final steps before Seoul and Washington set the final terms for a huge South Korean investment pledge in the United States.

The postponement of Thursday's briefing comes at a time when the two allies continue negotiations on the details of a trade agreement concluded last year, under which Seoul committed to investing $350 billion in the American manufacturing sector, in exchange for reducing customs duties on Korean imports to 15 percent.

Two officials in Seoul said that the dates for the parliamentary briefing and final announcement have not yet been decided, as negotiations continue.

South Korean news agency Newsy reported on Wednesday, citing a Korean parliamentary official, that the two allies are likely to hold a memorandum of understanding signing ceremony on September 23.

The implementation of the trade agreement witnessed delays, which prompted US President Donald Trump to threaten South Korea with higher tariffs earlier this year.

Of the total investments pledged by Seoul amounting to $350 billion, $150 billion has been allocated to the shipbuilding sector, while the two governments are working to finalize the terms of proposed projects for the remaining amount, amounting to $200 billion.

Several South Korean media outlets, including the Korea Economic Daily and Chosun Ilbo, reported this week that one of the proposals under discussion includes the possibility of South Korea acquiring a stake in the American company Westinghouse, which specializes in nuclear reactor technology.

According to reports, Seoul is seeking to acquire a minority stake in Westinghouse, with funding from its broader strategic investment fund in the United States, as part of a package that includes plans to build up to eight new nuclear reactors in the United States. Six of them are based on Westinghouse technology, and two are based on a South Korean model.

Other projects include plans to build a 6.3 gigawatt gas-fired power plant in the Encinal area of ​​Texas, at an estimated cost of $22 billion, to meet the growing demand for energy needed for artificial intelligence data centers, according to media reports.

Reports also indicated that Seoul is considering participating in a liquefied natural gas project in Alaska.

The Indian rupee recovered after early falling below the Rs 96 level against the dollar, to trade slightly higher on Thursday, supported by possible intervention from the Reserve Bank of India and traders reducing their bets on the currency's decline, at a time when the rupee is still facing multiple pressures.

The US Federal Reserve's interest rate hike and signs of further monetary tightening have put pressure on the rupee, adding to the pressures resulting from rising oil prices in light of the Iran-related war, according to Reuters.

However, dollar selling by government banks, likely on behalf of the Reserve Bank of India, helped reverse the trend and supported the currency.

Traders' reduction of their bets on the rupee's decline also contributed to enhancing its gains, as it rose to 95.90 rupees against the dollar, recovering from the lowest level recorded at 96.0925, and recording an increase of 0.1 percent from Wednesday's closing level.

The yield on India's benchmark 10-year bond rose slightly following the Federal Reserve's decision to raise interest rates, while traders increased their bets that the Reserve Bank of India may raise interest rates over the next year.

Swaps markets priced interest rate increases of about 90 basis points during that period, reflecting expectations that India may need to join a cycle of global interest rate hikes from which it has so far been spared.

Peer countries such as Indonesia, South Korea and the Philippines have been raising interest rates over the past few months, following the lead of major global monetary authorities such as the European Central Bank and the Bank of Japan.

Mitsubishi UFJ Bank said in a note that “the rise in US yields and the Federal Reserve’s continued policy of keeping interest rates high for a longer period may put pressure on Asian currencies.” Regional currencies recorded a decline of between 0.1 and 0.4 percent on Thursday.

Meanwhile, investors are also monitoring developments resulting from the passage of US legislation that gives the US President the power to impose strict tariffs of up to 100 percent on China and India, among other countries, with the aim of reducing dependence on Russian energy.

For its part, India pledged to protect energy security, and warned that such tariffs could affect relations between Washington and New Delhi.

Fundamental pressure on the rupee

In a separate assessment, Axis Bank said the rupee may need to depreciate further to keep pace with shifts in the fundamentals of trade, coupled with relatively lower productivity gains resulting from artificial intelligence.

Using the Fundamental Equilibrium Exchange Rate (FEER) model, the bank noted that the rupee was close to its fair value in March, but a terms-of-trade shock caused by higher oil prices due to Iran-related tensions, combined with smaller AI-driven productivity gains compared to other economies, may warrant further adjustment.

“A persistent terms-of-trade shock and a 5 percent loss in relative productivity associated with AI theoretically translates into an additional 10 percent decline in the real effective exchange rate within one year,” Tanay Dalal, an economist at Axis Bank, said in a note on the rupee outlook published on Wednesday.

Dalal expects the rupee to fall to 97 to the dollar by the end of the year, and to 100 by June 2027, levels that are weaker than futures markets indicate. In contrast, the average forecast of economists polled by Reuters set the rupee range between 95.25 and 96.80 over the next year.

The rupee has declined by 6 percent since the beginning of the year, making it among the worst-performing Asian currencies, in light of rising oil prices, slowing capital flows, and rising global bond yields.

Axis Bank research shows that India's "primary balance", which excludes volatile foreign portfolio flows and the impact of central bank interventions in the currency futures market, has recorded a deficit of $180 billion since mid-2023, even though the current account deficit averaged only 0.6 percent of GDP during the same period.

The bank estimates that the Reserve Bank of India sold about $250 billion to support the rupee during that period.

India has maintained a sustainable current account deficit of 2 percent for decades, but this level may have fallen to zero in recent years, indicating that the rupee can no longer withstand only limited external imbalances without weakening, according to Axis Bank.