MUMBAI (Reuters) - Indian palm oil importers have effectively stopped all purchases from top supplier Malaysia after the government privately urged them to boycott its product following a diplomatic spat, industry and government sources said.

FILE PHOTO: A worker unloads palm oil fruits from a lorry inside a palm oil factory in Salak Tinggi, outside Kuala Lumpur, Malaysia, August 4, 2014. REUTERS/Samsul Said

The warning, issued last week, comes almost in parallel with New Delhi’s move to restrict imports of refined palm oil and palmolein after Malaysia’s Prime Minister criticised India’s actions in Kashmir and its new citizenship law.

Consequently, Indian importers were not buying any crude or refined palm oil from Malaysia, at least five industry sources familiar with the matter told Reuters.

“Officially there is no ban on crude palm oil imports from Malaysia, but nobody’s buying due to government’s instructions,” said a leading refiner, adding that buyers now import from Indonesia despite paying a premium to prices in Malaysia.

India is the world’s largest importer of palm oil, buying more than 9 million tonnes annually mainly from Indonesia and Malaysia.

The move to effectively block imports from Malaysia could push up the country’s palm oil inventories and put pressure on its prices, which set the global benchmark for the oil.

(Graphic: Malaysia palm oil exports to top 5 markets click, )

It could also benefit Indonesia - the world’s largest exporter of crude palm oil (CPO).

“We could import CPO from Malaysia, but the government has warned: ‘Don’t come to us if your shipments get stuck,” said a Mumbai-based trader, adding “no one wants to see their shipments get stuck at ports.”

India was Malaysia’s biggest buyer of palm oil in 2019 with 4.4 million tonnes of purchases, Malaysian Palm Oil Board (MPOB) data showed.

In 2020, Indian purchases could fall below 1 million tonnes even if some buyers make small shipments to fulfil old orders, the trader said.

Malaysian palm oil futures extended losses on Monday after the Reuters story and closed down 1.4%.

India’s government has not made any public remarks about Malaysian palm oil. The commerce ministry did not immediately respond to a request for comment on Monday.

Malaysia’s Primary Industries Minister Teresa Kok, who is responsible for the palm oil industry, declined to comment.

Indian government and industry sources have told Reuters that Prime Minister Narendra Modi’s Hindu nationalist government was seeking to target Malaysia after recent criticism of India by Malaysian Prime Minister Mahathir Mohamad.

Mahathir said in October that India “invaded and occupied” Kashmir, a disputed Muslim-majority region also claimed by Pakistan. Last month he said India was stoking unrest with its new citizenship law, which critics say undermines the country’s secular foundations.

Indian refiners and traders have shifted almost all palm oil purchases to Indonesia, despite having to pay a $10 per tonne premium over Malaysian prices, four traders told Reuters.

(Graphic: Malaysia vs Indonesia palm oil exports to India click, )

Malaysian crude palm oil for February shipment was available at $800 a tonne on a free-on-board (FOB) basis, compared to $810 from Indonesia, traders said.

“Like everyone else, we are paying a premium for Indonesian supplies. For a small profit we can’t gamble,” said a refiner based at Kolkata.

Palm oil prices have jumped 60% in the last six months, due to a drop in production and higher demand for biofuel.