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NEW DELHI (Reuters) - A large trade delegation from sanctions-hit Iran, in India largely to buy farm commodities, has reached only a few small deals for animal feed due to problems using a new mechanism meant to allow payment of suppliers using the Indian rupee.
The 56-member team, led by the president of Iran's chamber of commerce, reached New Delhi on Sunday at around the time U.S. Secretary of State Hillary Clinton also arrived in India to persuade it to reduce oil imports from the Islamic republic.
India is the second biggest customer for Iranian crude oil, paying around $11 billion a year, and will remain a major buyer even if U.S. efforts to substantially reduce the trade succeed.
India hopes to boost its own exports to Iran to cut the trade imbalance between the two but a major obstacle is that U.S. pressure has led to the closure of the previous payment mechanism.
One of the Iranian traders, from Tehran, said the new arrangement, using the rupee, was still not working correctly.
"While using the rupee mechanism, we are facing some teething troubles and hope to enter into large contracts only after the new mechanism becomes fully-functional and hassle free," the trader said.
Traders said their group had made enquiries to buy commodities such as wheat, sugar and soymeal but had sealed deals to import only small quantities of animal feeds.
Until now, the rupee mechanism had just been used to clear a backlog of export debts and payments totalling 3.8 billion Indian rupees.
"Indian exporters have started getting their payment under the new mechanism but it is only 80 percent functional yet," said M. Rafeeque Ahmed, president of the Federation of Indian Export Organisations (FIEO).
The FIEO, a quasi-government body set up by the trade ministry, led a delegation to Iran in March when the new rupee payment mechanism was put in place after the closure of the previous conduit. The rupee mechanism uses an account in India's UCO Bank for payments to exporters.
The United States is using sanctions to try to dissuade Tehran from pursuing a nuclear programme that the West believes is aimed at producing arms. Iran says the work is for peaceful purposes.
In business clinched so far by the trade delegation, Iran placed an order to buy 2,000 tonnes of soymeal per month from India, totalling 24,000 tonnes a year at about $600 a tonne, including cost and freight, a buyer from Tehran said.
Separately, an Indian exporter was negotiating to sell 5,000 tonnes of the animal feed and a buyer from Tehran said his company was trying to negotiate to buy raw sugar.
In April, Iran stepped up soymeal purchases from India, taking up to 275,000 tonnes in trade deals at record prices.
Indian traders struck deals in March to export 60,000 tonnes of raw sugar to Iran for March-April delivery, marking their first sales of the sweetener to Tehran since Western sanctions were tightened at the start of 2012.
But Indian exporters say they now want clarity on the latest tightening of U.S. sanctions, announced on May 1, that will target foreigners helping Iran evade sanctions and bar them from access to the U.S. banking system.
Exports of essentials such as food and medicines to Iran are exempted from United Nations sanctions, by which India abides.
The Iranian delegation, which includes food and pharmaceutical companies as well as machinery makers, steel companies and petroleum products manufacturers, will be in major commercial hub Mumbai on Wednesday.
Editing by Anthony Barker