India to tap rupee route to Iran oil to by-pass US sanctions

India and Iran is reported to have revived a payment mechanism, similar to the one used during the previous sanctions (till 2015), allowing state-run Indian Oil Corp and Mangalore Refinery and Petrochemicals (MRPL) to make the payments through the Iran Federal Bank branch in Mumbai.

Speaking at an event in New Delhi, shipping, road transport and highways minister Nitin Gadkari said the mechanism would be finalised between the two countries in 8-10 days.

The sources said Iran, which has emerged as the third largest supplier of crude to India in recent months, is open to accepting rupee payment for oil and may use the money to pay for equipment and food items it buys from India.

Currently, India makes the payment to Iran in euros using European banking channels.

During the time of the previous last sanctions, Indian firms used to get payments for exports to Iran from oil payments due to that country held in rupee balances at UCO Bank.

For 2018-19, India had planned to import about 25 million tonnes of crude oil from Iran, up from 22.6 million tonne imported in 2017-18. But the actual volumes could turn out to be far less as companies like Reliance Industries have totally stopped buying oil from Iran and others too are scaling it down in hopes of winning a sanction waiver from the US.

However, reduced purchases from Iran would indeed have an impact on India’s crude import bill and trade deficit.

For India, however, it is more lucrative to buy oil from Iran as they get a credit of 60 days compared to around 30 days by other suppliers. India’s oil purchases from Iran, worth around $9 billion accounted for over 80 per cent of its total imports from the Persian Gulf nation in 2017-18.

In a recent report, Congressional Research Service (CRS) said, “During 2011-2015, India reduced its purchases of Iranian oil — at some cost to its own development — in order to receive from the US administration exemptions from sanctions. India has increased oil purchases from Iran to nearly pre-2012 levels after sanctions were lifted, and in May 2016, India agreed to transfer to Iran about $6.5 billion that it owed for Iranian oil shipments but which was held up for payment due to sanctions.”

India has a goods trade deficit of over $8 billion with Iran (thanks to massive oil imports). Agricultural commodities make up for a half of India’s $2.6 billion in merchandise exports to Iran. In fact, at $900 million, basmati rice alone accounted for over a third of India’s total exports to Iran in 2017-18, payments for which were made mostly in the euros by Iran.

The latest US sanctions follow President Donald Trump’s decision in May to withdraw from the 2015 nuclear accord with Iran. Some sanctions took effect from 6 August while those affecting the oil and banking sectors will start from 4 November.