India will waive taxes on rupee-payments for crude, it said in the Budget. That raised speculation refiners will start settling its oil bill with Iran in local currency to avoid international sanctions. While India could start paying for about 45% of the oil in rupees from next month, the countries prefer to settle trades in foreign tender such as euros, the people said, declining to be identified.
We have been bearish on the rupee and this is just another reason to sell the currency, said Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking, Australias second-biggest lender. The news is indeed negative for the rupee as it will increase demand for dollars in an already tight environment and further pressure the central banks reserves.
RC Joshi, a spokesman for oil ministry in New Delhi, didnt return two calls made to his mobile phone seeking comment. Mohsen Qamsari, head of international affairs at the National Iranian Oil, was not available to comment when called at his office in Tehran.
India, Irans 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 US 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% 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 US could lead Indian refiners to start rupee payments earlier than planned, before the EU sanctions take effect, the people said.
Indias rupee payments to Iran may total at least $4 billion a year, and will be deposited in Indias state-run UCO Bank (UCO), which doesnt have US operations and is unlikely to be affected by the global sanctions, one of the people said. Payments in foreign currencies are preferred because the rupee cannot be directly converted abroad.
While India proposed paying for oil in rupees, Iranian officials have sought partial payment in yen because theyre concerned that they may not get sufficient value from the currency, three people with knowledge of the talks said on January 23.
Transactions are now routed through Ankara-based Turkiye Halk Bankasi , which has told Indian refiners it may no longer be able to act as an intermediary when European sanctions take effect, four people with knowledge of the matter said.
US President Barack Obamas administration wants China, India and 10 other nations to present plans detailing how they will curtail Iranian oil imports, saying past cuts arent enough to win them an exclusion from new US sanctions.
While India hasnt asked its refiners to stop purchasing Iranian crude, the government has told processors in the South Asian nation to seek alternative supplies and gradually reduce dependence on the Persian Gulf state because of increasing pressure from the US, three Indian officials said.