March 28 (Bloomberg) -- India may continue paying for Iranian oil in foreign currencies until European Union sanctions take effect in July, when buyers will start using rupees, according to two people with knowledge of the matter.
India will waive taxes on rupee-payments for crude, it said in its March 16 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 percent 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 because the information is confidential.
“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 Corp., Australia’s 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 bank’s reserves.”
The rupee weakened as much as 0.6 percent to 51.0250 a dollar and was at 50.9225 at 11:32 a.m. in Mumbai.
R.C. Joshi, a spokesman for India’s oil ministry in New Delhi, didn’t return two calls made to his mobile phone seeking comment. Mohsen Qamsari, head of international affairs at the National Iranian Oil Co., was not available to comment when called at his office in Tehran.
India, Iran’s 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 U.S. 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 percent 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 U.S. could lead Indian refiners to start rupee payments earlier than planned, before the EU sanctions take effect, the people said.
India’s rupee payments to Iran may total at least $4 billion a year, and will be deposited in India’s state-run UCO Bank, which doesn’t have U.S. 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.
The Indian rupee has dropped 12 percent over the past 12 months, making it the worst performer among Asia’s most-traded currencies, according to data compiled by Bloomberg. It has fallen 3.8 percent this month, the data show.
While India proposed paying for oil in rupees, Iranian officials have sought partial payment in yen because they’re concerned that they may not get sufficient value from the currency, three people with knowledge of the talks said Jan. 23.
Transactions are now routed through Ankara-based Turkiye Halk Bankasi AS, 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 Jan. 10.
U.S. President Barack Obama’s administration wants China, India and 10 other nations to present plans detailing how they will curtail Iranian oil imports, saying past cuts aren’t enough to win them an exclusion from new U.S. sanctions.
While India hasn’t 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 U.S., three Indian officials with direct knowledge of the situation said March 23.
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