India is reported to have rejected a request by the Iranian government to approve the opening of branches of Indian banks in Tehran.

Iran says the banks would facilitate trade between the two countries in a new era of sanctions imposed by Washington on the Islamic Republic, but India says existing letter of credit (L/C) arrangements will suffice.

Global exclusion

The moves respond to Iran's exclusion from much of the global banking system after the US re-imposed tough unilateral sanctions last November on the Islamic Republic.

For the time being, India is benefitting from a six-month waiver from Washington after which the Trump administration has said the US will seek to penalise nations transacting business with Iran.

Bilateral relations

Tehran is keen to establish direct bilateral banking relations with key trading partners to ameliorate the impact of sanctions when the waiver comes to an end in May, but India says this is not needed.

"There is no need at all" to establish bank branches in Iran, an official in India's ministry of external affairs reportedly said.

L/C arrangements

India currently pays Iran in Indian rupee for purchases. Iranian exporters then convert payments to rial, while in most cases the Indian rupee is used to make payments for products Iran imports from India. Transactions are worked out through Indian and Iranian banks on L/C terms.

Despite its refusal of the request for Indian banks to open in Tehran, New Delhi has allowed Iran's Bank Pasargad to open a branch in Mumbai later this year.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.