Indian merchants recently have almost entirely stopped signing new export contracts with Iranian buyers due to caution about Iran’s falling rupee reserves with Indian banks.

  • Earlier in 2020, Union Ministry of External Affairs informed that India is no longer involved in the Farzad-B gas field project of Iran. The reasons included policy changes by the Iranian government, Iran’s uncertain finances, and American sanctions situation.
  • In the year 2020, Iran also passed a bill allowing the government to slash four zeros from the Rial and authorizing its replacement with another basic unit of currency called the toman (redenomination).

Falling Reserves

  • Iran’s rupee reserves in India’s UCO Bank and IDBI Bank, the two lenders authorised to facilitate rupee trade, have depleted significantly.
  • Reasons
    • Under the US sanctionsIran is unable to use US dollars to transact oil sales.
    • Iran previously had a deal to sell oil to India in exchange for rupees, which it used to import critical goods, including agricultural commodities, but India stopped buying Tehran’s oil in May 2019 after a USA sanctions waiver expired.
    • Iran continued using its rupees to buy goods from India, but after 22 months of no crude sales, Iran’s rupee reserves have fallen.
      • Iranian reserves have reduced significantly and will be over soon probably because trade has stopped.
  • Implications
    • Apprehension of Exporters
      • Exporters are not sure whether they would be paid on time for new shipments and they are avoiding dealing with Iran since payments are getting delayed.
    • Falling Indian Exports
      • Overall Indian exports to Iran fell 42 per cent in 2020 from a year ago to $2.2 billion, the lowest in over a decade.
      • The fall is continuing in 2021 and in January this year exports more than halved from a year ago to $100.20 million.
    • Growing Chinese Influence
      • Recently Iran and China signed a deals will vastly expand Chinese presence in banking, telecommunications, ports, railways and dozens of other projects.
    • Saving India’s Interests
      • The China Iran strategic partnership fructifying $400 billion deal may be an impediment for Indian entry routes into Afghanistan through Chabahar and further connectivity to International North South Transportation Corridor (INSTC), although Iran has not given any signals of disruption of these projects.
    • India’s Role in the Region
      • To Maintaining ties with Iran even as it forges a new relationship with Saudi Arabia and Israel is critical for its balancing policy in West Asia.
    • Avoiding Sectarian Tension
      • Since India is home to sizable populations of both Shia and Sunni Muslims and seeks to isolate itself from any sectarian tensions in the region, India should do well to neither completely break off ties with Iran nor go against the United States outright.
    • India’s Energy security
      • India has stopped purchasing Iranian oil, which accounts for around 90 per cent of its imports from the Islamic nation.
        • India was Iran’s leading oil client after China until mid-2018.
    • Peaceful Afghanistan
      • India, having made significant investments in neighbouring country Afghanistan, will always hope for an Afghan elected, Afghan led, Afghan owned peace and reconciliation process and a popular democratic government in Afghanistan.
      • However, India has to be watchful of Iran – Pakistan- China axis developing in the neighbourhood of Afghanistan, with tentacles in the form of terror groups inside it.
    • Pakistan’s Influence
      • Pakistan is very active in the Middle-east. Using the platform of Organisation of Islamic Cooperation and making connections with the particular Arab countries, Pakistan is trying to get support on the Kashmir issue.

Ahead

  • In the year 2019, New Delhi seems to have weighed in favor of Indo-US ties by deciding to halt oil imports from Iran. However, it will have to find a way, either by persuading Washington to grant an exemption or by circumventing US sanctions like it did in the 2012-13, to continue its relationship with Iran in order to secure its energy supply and its regional foreign policy objectives.
  • India is very reliant upon Middle East oil and gas and must maintain cordial relations with most of the major suppliers, including Iran, United Arab Emirates, Qatar, and Saudi Arabia, as well as Iraq.

Falling Indian Rupee Reserves of Iran Falling Indian Rupee Reserves of Iran