India Said to Plan Using Foreign Currency for Iran Oil Deals as Rupee Falls

India may continue paying for Iranian (OPCRIRAN) oil in foreign currencies until European Union sanctions take effect in July, when buyers will start using rupees.

Refiners will start settling its oil bill with Iran in local currency to avoid international sanctions. While India could start paying for about 45 percent of the oil in rupees from next month, the countries prefer to settle trades in foreign tender such as euros.

The rupee weakened as much as 0.6 percent to 51.0250 a dollar and was at 50.9225.

In the meanwhile, the FIEO delegation to Iran returned with bagful of orders for commodities. The UCO Bank – Persian Bank link with facilitate payment for exports. The rupee balances on import payments will retire exporters bills on the debit advice of Persian Bank. Now that rupee is falling, it is a moot point whether Iran exporters will accept payment in the falling currency.

Indian commodity exporters say the compulsory use of LC as specified by RBI is coming in the way of export contracts. The exporters in India are used to advance payment while Iranian importers too are in favour of the same mechanism. FIEO is working on an amendment to the special procedure to include advance payment. Regarding retirement of over dues, the FIEO President says that the first charge in the UCO Bank procedure will be clearing past dues. (The ECGC has yet to speak its mind in covering the payment risk on Iran shipments. It is still stuck on its policy of sanction on case to case basis - Editor).

International Sanctions

India, Iran’s second-biggest oil customer, is trying to maintain bilateral trade in the face of escalating economic and financial measures against the Islamic Republic over its nuclear program, which the U.S. and its allies say is a cover to make atomic weapons. Iran says the program is for civilian purposes.

The South Asian nation, which relies on imports for almost 80 percent of its oil requirements, has faced difficulties finding banks willing to transfer payments to Iran since the Reserve Bank of India in December 2010 dismantled a mechanism to settle trade in euros and dollars.

Increased pressure from the U.S. could lead Indian refiners to start rupee payments earlier than planned, before the EU sanctions take effect, the people said.

India’s rupee payments to Iran may total at least $4 billion a year, and will be deposited in India’s state-run UCO Bank (UCO), which doesn’t have U.S. operations and is unlikely to be affected by the global sanctions. Payments in foreign currencies are preferred because the rupee cannot be directly converted abroad.

Rupee Drops

The Indian rupee has dropped 12 percent over the past 12 months, making it the worst performer among Asia’s most-traded currencies. It has fallen 3.8 percent this month, the data show.

While India proposed paying for oil in rupees, Iranian officials have sought partial payment in yen because they’re concerned that they may not get sufficient value from the currency, three people with knowledge of the talks said Jan. 23.

U.S. President Barack Obama’s administration wants China, India and 10 other nations to present plans detailing how they will curtail Iranian oil imports, saying past cuts aren’t enough to win them an exclusion from new U.S. sanctions.