BREAKINGVIEWS - Iranian oil-for-rupees poses diplomatic dilemma

MUMBAI Thu Feb 9, 2012 4:26pm IST

Fuel overflows as an Iranian man pumps gasoline into his car at a gas station in Tehran January 21, 2007. REUTERS/Caren Firouz/Files

Fuel overflows as an Iranian man pumps gasoline into his car at a gas station in Tehran January 21, 2007.

Credit: Reuters/Caren Firouz/Files

Related Topics

Stocks

   

MUMBAI (Reuters Breakingviews) - India and Iran share close historical links -- or so argued India's first prime minister, Jawaharlal Nehru. Now economic interests are pulling the two countries closer again. India has struck a clever deal to pay for Iranian oil in its own not freely convertible currency, the rupee. It could be a diplomatic hot potato.

New Delhi buys $12 billion of oil a year from Iran. But the trade isn't balanced. Iran only spends $2.7 billion on Indian exports, according to Tehran. Under the mooted plan for 45 percent of Iranian oil to be settled for in rupees, Tehran would end up with a surplus of nearly $3 billion in rupees, assuming trade levels remain constant. If all of Iran's payment shifted to rupees the surplus would be $9 billion per year.

That illiquid currency would be like a gift card that the holder can only spend in Indian shops. Iran needs a plan.

One option would be to leave the money in the bank. Currently India pays Iran in dollars through a Turkish bank. But the two countries have agreed that Iran can stash its rupees in the Indian state-owned UCO Bank, which would probably yield an interest rate of 4 percent, but expose Tehran to currency risk.

Alternatively Iran could start to buy more rice and agricultural products from India. Under new U.S. sanctions, shortages are beginning to bite. India could even become a trading hub for third countries to sell to Iran, much as India and Pakistan's trade is often routed through Dubai. But the more India does to ease the pain of sanctions, the more Washington will bristle.

The third option is for Iran to invest the money, say in Indian bonds or equities. Politically, Washington would be unlikely to find that appealing -- though given India's need to fund a capital account deficit, it might be hard to refuse cash on the table.

For the world, a deal between India and Iran is probably a good thing. It means less upward price pressure on non-Iranian oil, especially as China has been cutting purchases from the rogue state. But closer economic ties could come with political consequences.

CONTEXT NEWS

-- India increased its imports of Iran's oil to become the largest buyer in January, partly offsetting a cut in Chinese purchases, the Wall Street Journal reported on February 9.

-- New Delhi planned to send a delegation to Iran to explore boosting exports. The two sides have agreed to use the rupee, which is not freely convertible, to settle 45 percent of India's oil purchases, Reuters said on February 7.

-- Iranian buyers defaulted on payments for about 200,000 tonnes of rice from India, a sign of the mounting pressure on Tehran from a new wave of Western sanctions, Reuters reported on February 7 citing exporters and rice millers.

-- India buys around 12 percent of its oil from Tehran. It pays in dollars through a Turkish bank after a previous clearing mechanism was shut down in December 2010.

(Editing by John Foley and Sarah Bailey)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Shares Hit Record

Sensex, Nifty rise to second consecutive record high

Sensex surges 500 points on BOJ easing, L&T gains

The BSE Sensex and Nifty surged to record highs for a second consecutive session on Friday after Bank of Japan's surprise expansion of its massive stimulus programme raised hopes for additional foreign inflows, boosting blue-chips such as Larsen & Toubro.  Full Article 

REUTERS SHOWCASE

Wilful Negligence?

Wilful Negligence?

SEBI piles pressure on Sahara to sell overseas hotels  Full Article 

Indian Economy

Indian Economy

India's fiscal deficit in H1 almost 83 pct of full-year target.  Full Article 

M&M Earnings

M&M Earnings

M&M Q2 net profit down 4 percent, hit by poor monsoon.  Full Article 

Ban on E-Cigs?

Ban on E-Cigs?

Govt considers ban on e-cigarettes, sale of single smokes.  Full Article 

Commodities

Commodities

Silver futures in India hit four-year low on global cues.  Full Article 

BOJ Policy

BOJ Policy

BOJ shocks markets with surprise easing as inflation slows.  Full Article 

Shadow Banking

Shadow Banking

China's shadow banking sector growing rapidly, third largest in world - FSB.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage