India wants to use rupee crash to buy more Iranian oil

Indian Vice President Hamid Ansari meeting Dr. Hassan Rouhani, in Tehran earlier this month on the sidelines of his swearing in as the new President of Iran | Photo: Ministry of External Affairs

The falling value of the Indian rupee against the US dollar has been good news for Iran, which is facing crippling unilateral US economic sanctions. It has meant New Delhi, which pays for Iranian oil in Indian currency, has found it to its advantage to increase its imports of Iranian crude. New Delhi sought a similar arrangement with Baghdad when the Iraqi PM Nouri Al-Maliki came calling last week but is yet to receive a positive response.

In 2011, Iraq replaced Iran as the second largest supplier of crude to India after Saudi Arabia. The reason being the US economic sanctions which compelled Indian banking, shipping and other companies to stop transactions with Iranian Central Bank and other companies or face sanctions. India and Iran devised a special mechanism to continue their bilateral trade.

But in a bid to protect the falling rupee India’s been forced to look at importing more oil from Iran. Finance Minister P Chidambaram told Parliament earlier this month that New Delhi was exploring importing more Iranian oil as part of several measures being taken to halt the rupee’s slide. “Within the UN sanctions and fully complying with the sanctions, there may be more space for imports from Iran,” said Chidambaram.

Iranian media, hungry for any news that helps lift the morale of the common Iranian at a time of scarcity because of the sanctions, widely reported the Indian Finance Minister’s comment. The visiting Iranian oil minister Rostam Qassemi and his Indian counterpart M Veerappa Moily also discussed the possibility of increasing Indian oil imports from Iran.

On August 17, the Mangalore Refinery and Petrochemicals Ltd. (MRPL) received 85,000 metric tonnes of Iranian crude, with three more identical shipments expected in the coming days. The refinery is exploring import of more Iranian oil. India pays for Iranian oil in rupees. The payment is deposited in an Iranian government bank account in UCO Bank’s Kolkata branch, which the Iranians then use to pay Indian exporters who supply agricultural produce like wheat and other goods to Iran. The mechanism not only saves foreign exchange but keeps the India-Iran balance of trade at an even keel.

Iran, on its part, is making efforts to escape sanctions and has recently purchased seven oil tankers from China. India continues to remain the second biggest importer of Iranian crude after China. After a drop in 2009-10 and 2010-11, Indian import of Iranian oil increased by nearly 40 percent in 2012-13.

The falling rupee has made India propose a similar mechanism of payment for its purchase of oil from Iraq. That New Delhi was forced to lower its oil imports from Iran came as an opportunity for Iraq, whose oil industry has started to look up after several years of disruption in oil production because of war and civil unrest.

India-Iraq trade was USD 5 billon in 2006-07 which increased to USD 21 billon in 2012-13, primarily because of the increase in India’s import of Iraqi oil. It also made Iraq one of the top ten trading partners of India. However, this bilateral trade is heavily in Iraq’s favor with India importing USD 20 billon worth of crude from Iraq, 12.9 per cent of its total oil needs. India plans to increase its import of Iraqi oil but hopes Baghdad would agree to rupee payments. Iraqi PM Maliki’s visit, the first in 38-years, set the stage for the two countries to have a strategic partnership. The two sides important agreements in the field of oil sector.

Iran has been India’s second largest supplier of crude oil for five years from 2005-06 until 2010-11. In 2011-12, Indian oil companies increased their imports from UAE, Kuwait and Iraq and reduced their dependence on Iranian oil because of US economic sanctions. Saudi Arabia is India’s topmost supplier of crude. Iraq replaced Iran as India’s second largest supplier of crude in 2011-12. Continued decline in India importing oil from Iran made it slip to seventh largest provider of crude to India in 2012-13, falling behind Saudi Arabia, Iraq, Kuwait, Venzuela, etc.

However, India’s imports of Iranian oil may again increase in 2013-14 because of the slide of the rupee and India securing a waiver from the US for Indian entities doing business with Iran.