India may settle oil contracts with Iran in rupee using a bank from the Gulf nation from next fiscal when the US imposed sanctions get stricter and existing exemptions to few oil importing nations is phased out.
Sources privy to the development told FC that Iranian Bank Pasargad could become the channel for rupee/rial dealings in the oil trade between the two countries from early part of next fiscal when the real picture emerges about the scale of disruption in oil supplies from the Gulf country post lifting of exemptions.
Earlier in the day, shipping and road transport and highways minister Gadkari said the Reserve Bank of India (RBI) has given all clearances to an Iranian bank which to open a branch in Mumbai within the next three months. He was speaking after a meeting with Iran's foreign minister Md Javad Zarif in the national Capital.
Though the minister stated that the Iranian bank operations in India will be used for transactions related to Chabahar port that is getting fully operationalised soon, sources said that it could also be used for settling rupee payment that Indian oil companies make for importing Irian oil. Currently, similar payment is being undertaken through a UCO bank branch. Indian oil companies including Mangalore refineries, Indian Oil Corporation have already concluded contracts with Iran for supply of oil well till the end of FY18.
The new payment mechanism would be similar to a barter-like scheme adopted by India when the previous West-led sanctions dispruted country’s trade with Iran. This system allowed India to make a portion of oil payments to Tehran in rupees through state-run UCO Bank that did not have a US exposure that could lead it to fall foul of any new sanctions.
The rupee settlement mechanism is still in practice in the trade between the two countries, though the quantum came down substantially since early 2016 when West-led sanctions were lifted on Iran. Thereafter, Iran also readily started receiving payments convertible Euros. Iranian oil is a lucrative buy for refiners as the Persian Gulf nation provides 60 days of credit for purchases and also insurance cover, terms not available from suppliers of substitute crudes — Saudi Arabia, Kuwait, Iraq, Nigeria, and the US.
India, the world’s third-biggest oil consumer, meets more than 80 per cent of its oil needs through imports. Iran is its third largest supplier after Iraq and Saudi Arabia and meets about 10 per cent of total needs.
US President Donald Trump in May withdrew from the 2015 nuclear accord with Iran, re-imposing economic sanctions on the Persian Gulf nation. Some sanctions took effect from August 6, 2018, while those affecting the oil and banking sectors started from November 5, 2018.