To sweeten the deal for Iran regarding purchase of oil from that country, India will allow the Persian Gulf nation to use the payments made by Indian refiners to an escrow account to meet the expenses of Iranian students and medical tourists.
To sweeten the deal for Iran regarding purchase of oil from that country, India will allow the Persian Gulf nation to use the payments made by Indian refiners to an escrow account to meet the expenses of Iranian students and medical tourists. The two sides have also agreed that reference rate of Financial Benchmarks India (FBIL) will be used as the exchange rate to pay for Iranian oil in the rupee.
During the earlier sanctions era between 2012 and 15, the two countries had put in place a swap facility under which Iran could make payments for imports of medicines, medical devices and food grains from India against the latter’s oil import bill. While this facility will be available during the current sanctions as well, the decision to extend the mechanism to students and medical tourists is expected to make it more favourable for the nation facing the US sanctions.
Currently, 7,000-8,000 students from Iran are present in India across academic disciplines offered by Indian institutes. More than 40,000 Iranians come to India every year for various purposes, including medical treatment.
Following the US waiver to India to import restricted quantity of crude oil from Iran for the next six months starting November, the Persian Gulf nation signed a memorandum of understanding with India in early November to accept payment in rupee as the European banking which was used to make payments are now blocked.
Domestic refiners will make rupee payments in a UCO Bank account of the National Iranian Oil Co and the money deposited in this account will be used by Iran to pay for imports from India. The bank is likely to make an announcement regarding payment specifics by the end of this month.
However, unlike the earlier sanctions regime when India made 45% of the payment in rupee — which was used by Iranians to settle payments for imports — and 55% remained due in euro denomination as channels were blocked, India will be making 100% payment in rupee during now. During the last phase, India first used a Turkish bank to pay Iran for crude oil. However, starting February 2013, it paid almost 45% of the oil import bill in rupees and kept the rest pending till opening of payment routes. India started clearing the dues when the restrictions were eased in 2015.
India has a goods trade deficit of over $8 billion with Iran, mostly due to massive oil imports. Farm commodities make up for a half of India’s $2.6 billion in goods 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.
India and Iran have also agreed that the reference rate of FBIL will be used for currency exchange. FBIL is jointly promoted by Fixed Income Money Market and Derivative Association of India, Foreign Exchange Dealers’ Association of India and Indian Banks’ Association.
According to experts, while there are more exchange rates available such as that in Dubai and Singapore exchanges, FBIL is an official reference rate recognised and published by the Reserve Bank of India on its website daily. “While all rates are mostly aligned, the rates prevailing overseas carry their understanding and perceptions,” said Sunil Kumar Sinha, chief economist and director of public finance at India Ratings.
India, which uses 80% of imported crude oil for its requirements, imports around 10% of its crude oil requirement from Iran, the third largest supplier after Saudi Arabia and Iraq. For 2018-19, India had planned to import about 25 million tonne of crude oil from Iran, up from 22.6 million tonne imported in 2017-18. But the actual volumes could turn out to be less due to curtailed import at present.
During the exemption period, India can import a up to 300,000 barrels a day of crude oil compared with an average daily import of nearly 560,000 barrels earlier.