India, Iran to settle some oil trade in rupees: Source

India and Iran have agreed to settle some of their USD 12 billion annual oil trade in rupees, a government source said on Friday, resorting to the restricted currency after more than a year of payment problems in the face of fresh, tougher US sanctions.

India, the world's fourth-largest oil consumer, relies on Iran for about 12% of its imports or 350,000-400,000 barrels per day (bpd) and is Tehran's second-biggest oil client after China.

But Washington has snapped tighter financial sanctions on Iran and wants Asia, Tehran's biggest oil market, to cut imports in a bid to pressure the Islamic nation to rein in its nuclear ambitions, which it suspects are aimed at making weapons.

Iran rejects the charge and says its programme is for peaceful means.

India's central bank stopped one clearing mechanism in December 2010 for Iran payments and refiners finally managed to secure a route through Turkey's Halkbank in July 2011 but this could be vulnerable to the new US measures.

An Indian delegation has been in Tehran this week discussing options for payment and the source said the decision to pay in rupees was made after a meeting there.

"The Central Bank of Iran will open an account with an Indian bank for receiving payment and settling its import," the source, who has direct knowledge of the matter, said, adding the new system will start "soon".

The source did not specify the name of the Indian bank. But other sources have said that Iran could open an account with India's UCO Bank as it does not have any interests in the United States.

In addition to rupee payments, Indian refiners will continue to make payments through the current mechanism using Halkbank, this source said, "as long as it continues".

Turkey and Iran said on Thursday they want to increase financial transfers and that work is underway to strengthen banking ties.

The new US sanctions, authorised on December 31, penalise any financial institution dealing with Iran's central bank, the main clearing house for oil payments. However, a country can earn a waiver if it significantly reduces trade with Iran.

India, whose biggest supplier is Iran's OPEC and regional rival Saudi Arabia, has said it will not seek a waiver and will continue to trade with Iran, following only UN sanctions.

India Trade Secretary Rahul Khullar said this week that the Indian delegation to Iran would work around the US sanctions to protect oil supplies and promote Indian exports.

The government source said Iran has agreed to step up imports from India which added up to some USD 2.7 billion in 2010/11 and including oilmeal, rice and tea.

"This will cushion them (Iran) to some extent from exchange rate volatility," the source said.

The rupee is only partly convertible, limiting its acceptability internationally. In addition, it was the worst performing major currency in Asia last year, losing about 16% against the dollar, and it remains volatile.

Asian support for US sanctions is vital since the region buys more than half of Iran's daily crude exports. The European Union has agreed in principle to halting Iranian crude imports and could finalise the ban on January 23.

China, Iran's biggest crude customer, has rejected the US sanctions as overstepping the mark and defended its extensive imports from the second-biggest oil producer in OPEC.