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India to buy Iranian oil in rupees: Here's how the agreement will work

India to buy Iranian oil in rupees: Here's how the agreement will work

India to buy Iranian oil in rupees: Here's how the agreement will work
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By CNBC-TV18 Dec 7, 2018 2:36:34 PM IST (Updated)

India will import crude oil from Iran using a rupee-based payment mechanism, an industry source involved in discussions told Reuters on Thursday.

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"An agreement had been signed by the Indian and Iranian government on Nov. 2 2018 for oil payment in rupees and 50 percent of those funds had been earmarked for exports," reads an Indian government document, reviewed by the agency.
India is among the eight countries exempted from US sanctions on Iran oil. The country receives nearly a tenth of its crude supplies from Iran and it is Iran's second-biggest client.
Oil payments are being made in rupees only as against earlier arrangements where there was a ratio of 45 percent rupees and 55 percent euros, the document said.
Under the US sanctions, India is allowed to export farm commodities, food, medicines, and medical devices to Iran. Iran could use the rupee to pay for imports from India.
Here's what the agreement means for India
The agreement of buying oil in rupees will help strengthen the rupee as India will not need US dollars to import the oil.
As US dollar is considered to be the global currency, the exchange of goods from one country to another generally takes place through the exchange of dollars.
However, as the deal comes into effect, the demand for dollar in India will not be as much to buy oil, making the overall demand fall and creating a surplus of the currency. Consequently, it will lead to the strengthening of the Indian currency. 
India had planned to import about 25 million tonnes of crude oil from Iran in the current fiscal, up from 22.6 million tonnes imported in 2017-18.
Here's how it will work
India, according to Reuters, has given the responsibility to UCO Bank to route the payment as it has no exposure to the US financial system. The bank is expected to announce the payment mechanism in the next 10 days, a Reuters report quoting sources said.
The payment mechanism may change from what was being followed prior to the sanctions, according to a Business Standard report.  India may opt to go back to cost, insurance and freight (CIF) mode as against the free-on-board (FOB) mode.
CIF and FOB are shipping agreements between the two trading countries used for transporting goods between a buyer and a seller. The two differ in who assumes responsibility for the goods during transit. In CIF, the seller assumes the responsibility, in this case, Iran and in FOB, the buyer takes the responsibility.
In CIF, the exporter takes care of the costs and pays freight and insurance charges while in FOB, the buyer charters a vessel to ship crude. However, if India does get into CIF mode, it can be more expensive for buying oil.
With inputs from agencies
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