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  Business   In Other News  01 Nov 2018  India will pay in rupees for Iran oil post-US sanctions

India will pay in rupees for Iran oil post-US sanctions

FINANCIAL CHRONICLE
Published : Nov 1, 2018, 10:48 am IST
Updated : Nov 1, 2018, 10:48 am IST

The Reserve Bank of India (RBI) has given its nod to Iranian Bank Pasargad to set up a branch in Mumbai.

Indian oil companies would use this branch to deposit their payment for oil imported from Iran in rupee.
 Indian oil companies would use this branch to deposit their payment for oil imported from Iran in rupee.

New Delhi: India will settle oil contracts with Iran in rupee using a bank in the Gulf nation post November 4 when the US sanctions would freeze all payment channels using international currency.

Sources privy to the development told FC Iranian Bank Pasargad could become the channel for rupee/rial dealings in the oil trade between the two countries later this month when the real picture emerges about the scale of disruption in oil supplies from the Gulf country.

The Reserve Bank of India (RBI) has given its nod to Pasargad to set up a branch in Mumbai. Indian oil companies would use this branch to deposit their payment for oil imported from Iran in rupee.

Also, an earlier rupee payment window opened with UCO Bank or IDBI Bank may be utilised again for making payments for Iranian oil post sanctions.
“The rupee/rial trade with Iran is again being looked seriously as the spectre of wider sanctions on the Gulf nation looms. This would benefit both the countries as Iran can get uninterrupted payment for its oil supplies while India may not face supply disruptions,” said a government official privy to the development.

Indian oil companies, including Mangalore Refineries and Indian Oil Corporation, have already concluded contracts with Iran for supply of oil well into November. Payment for all supplies post November 4, could be settled in rupee, said the government source.

The new payment mechanism would be similar to a barter-like scheme adopted by India when the previous West-led sanctions disrupted the 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. Thereafter, Iran also readily started receiving payments in convertible euros. “It is early to suggest what will be good for India as current sanctions is concentrated only to US and the European Union is still to come on board on it. If the sanctions are only US driven, euro trade could continue without hindrance,” said an oil sector expert not willing to be named.

But experts now fear that the US might stop Iranian banks’ access to the global transaction network SWIFT thereby curbing all transactions in foreign currencies. This would leave no alternative for India but to revert to the rupee payment mechanism.

Sanctions on Iran could result in some supply disruptions. This could just be the beginning of further bad news for India. Iran is pumping nearly 4 million barrels a day of oil since the historic 2015 deal with six world powers that lifted crippling sanctions on the country. A major disruption in Iran could send crude prices sharply higher just as the oil market is emerging from a prolonged period of oversupply. Iran was India's second biggest supplier of crude oil after Saudi Arabia till 2010-11 but western sanctions over its suspected nuclear programme relegated it to the 7th spot in the subsequent years. In FY17, Iran again became third largest oil supplier to India after Saudi Arabia and Iraq with its supplies jumping to 27.2 mt. This year (FY19) so far India has imported close to 10 mt of oil from Iran.

Oil companies are confident that their refineries would not suffer even if Iranian oil imports were to completely stop. But New Delhi is keen to continue buying oil from its traditional ally. This would mean that India would possibly use escrow accounts for payment against crude oil imports, in rupee, and may cut down its import a bit but will certainly not stop its oil import from Iran completely.

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.

Tags: iran oil, rupee, payment, oil payment, rbi, oil companies
Location: India, Delhi, New Delhi