Under the recent trading agreement of Feb 2012, UCO Bank of India was nominated to deal with four Indian banks for payment in a 55:45 ratio of hard currency and rupees respectively. This agreement came under pressure both from the US and EU. They insisted that, the shipping insurance to Iran origin Cargo, India must be paid entirely in rupees for the import of crude oil to which Iran has remained defiant. The intention of US and the EU is to starve Iran of foreign exchange earnings
This agreement is further threatened by the recent initiative of Obama administration with the EU and with Russian intermediation to end the US and euro embargo on Iran. This will mean that the US and its allies cannot stand in the way of other countries trading with Iran.
Now, Iran can insist on India paying in foreign currency for oil imports. Iran has good reasons to do so.
One: There has been a depreciation of rupee against the dollar (1 US fetched 54 in Feb 2012 and new fetches 63)
Two: Because of the earlier agreement Iran imported large quantities of wheat, corn and sugar from India. Now that they can import freely. They may source these goods from elsewhere also. Also Indian basmati rice will be pitted against aromatic varieties of Thailand and Pakistan
The end of the rupee payment agreement will affect both our imports as well as exports. In all likelihood our merchandise trade deficit will increase. The Indian government should become proactive and should find a soft landing.