Ditching the dollar, Iran and India have agreed to settle all outstanding crude oil dues in rupees in preparation to future trade in their national currencies. The dollar dues — $6.5 billion equaling 55 per cent of oil payment — would be deposited in National Iranian Oil Co account with Indian banks.

Sources said work was underway to amend the agreement with Iran to allow entire crude oil payment to be made in rupees. “Finance Ministry is moving a Cabinet note on withholding tax exemption on oil payments,” they said.

Since 2013, Indian refiners have been depositing 45 per cent of their oil payments to Iran in rupees with UCO Bank and withholding the remainder after a payment route through Turkey’s Halkbank was stopped under US and European sanctions.

The payment agreement needs amendment as tax exemption is contingent on the pact notified by the Centre in January 2012 which allows only 45 percent of oil payments in rupees. Budget 2012-13 exempted Indian refiners from withholding 40 per cent tax while paying NIOC.

Sources said IDBI Bank, which is also highly insulated from global sanctions due to lack of overseas presence, would be authorised to open a joint account in which $4 billion would be parked for non-oil imports.

The remaining $2.5 billion would be deposited in UCO Bank. “One option being considered is to provide a $150 million loan to Iran for the development of Chabahar port through UCO Bank,” said sources.

Sources added that Iran also plans to use these rupee deposits in Indian banks as collateral for printing more rials through its central bank. And once the sanctions are lifted, they said, a large share would be transferred to Iran through conversion in Euros.

The currency switch policy is part of the offensive by both countries ahead of a significant surge in trade once the sanctions are lifted. Keeping that in focus, two are preparing a Preferential Trade Agreement and working on increased connectivity in banking sector for which India’s finance ministry has approved that Iran be removed from the sensitive list.

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