With the UAE refusing to route its payments for Iranian crude oil, India has decided to pay its second-largest oil supplier in rupee.
"Finance Ministry is preparing a note for the Cabinet for payments for Iranian oil in rupee," a top government official said. Under the proposal, National Iranian Oil Co will open rupee account with Indian banks and can use the money to purchase non-strategic items like railway imports and buying commodities.
It cannot, however, use the money to invest in India or buy shares or companies.
The ministry is preparing a list of what Iran can do with the money and what it cannot.
The official said Reserve Bank of India, which had in December last year discontinued a long-standing mechanism of payment through central banks, had previously opposed payments for Iranian oil in rupee but has now relented.
India had in February started making euro payments through an Iranian bank based in Germany.
But under US pressure, Germany soon stopped accepting money from India for onward transfer to Hamburg-based EIH Bank, sending India to doorsteps of UAE.
The government explored if Indian oil firms can open accounts in banks like Dubai-based
Noor Islamic Bank for direct transfer of money to Iran.
But the UAE, too, refused to route payments.
New Delhi also approached Turkey but failed to get any response, the official said.
India imports 12 million barrels of crude oil every month from Iran, which is the nation's second-largest supplier after Saudi Arabia.
The problem began after RBI on December 23 did away with the Asian Clearing Union mechanism for paying for Iranian crude oil imports, which make up for 12 per cent of the nation's oil needs.
In February, it began clearing past dues for Iranian oil imports by making euro payments through German-based Europisch-Iranische Handelsbank AG.
But EIH, which is owned by Iran, is a banned entity in the US, and Washington persuaded Germany to stop payments.
About 1.5 billion euro had been paid through EIH when Germany refused to accept any further payments for the purpose.
This has resulted in outstanding payment of $2.8 billion as on March-end towards Iran, which has continued to supply oil on credit.
Oil supplies from Iran have, however, not been affected and the Gulf nation continues to sell oil on credit backed by corporate guarantee.