What’s wrong with RBI

January 7, 2011

Does India want to trade with Iran or not? It seems Indian companies do, but the government doesn’t. Or that is the signal the Indian government is giving out through its thoughtless, preposterous actions.

On 27 December 2010, the Reserve Bank of India (RBI) through a notice circulated to all Indian banks ruled that all payments for trade transactions would be settled outside the Asian Clearing Union (ACU) mechanism. ACU — set up in 1975 to facilitate payments between nine Asian countries that include Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka – is the simplest and most economical mechanism to settle payments for intra-region transactions.

Most of India-Iran business happens through the ACU. And avoiding this route means creating hurdles for the bilateral trade, dominated by oil. Iran is India’s second-largest supplier of crude oil after Saudi Arabia.

Strangely, the RBI circular ascribed the ban on ACU transactions to the “difficulties being experienced by importers / exporters in payments to /receipts from Iran”. While the “difficulties” being faced by importers/exporters are hard to fathom, geo-political experts say the real reason is the pressure from the US, which wants to tighten the screws on Iran. As part of its strategy to bring Iran to its knees through economic sanctions, the US has blacklisted most of Iran’s companies, including its central bank.

The RBI’s move to first block ACU and then think of an alternative mechanism ruffled Iranian feathers – worried Iran central bank officials hurriedly conducted meetings with their Indian counterparts, who offered a temporary solution for payment settlements. As per the temporary arrangement, the State Bank of India – an Indian-government owned bank – will make the payment to the European-Iranian Trade Bank (EIH Bank). However, this solution is unlikely to continue as EIH Bank comes under US sanctions. According to US laws, any foreign company doing business with a firm under the US sanctions list can be barred from doing business in the US. The State Bank of India has branches in the US and therefore, it runs the risk of losing its US business.

Interestingly, Iran faces sanctions only from the US. It doesn’t face any sanction from the United Nations or the European Union. Under such circumstances, the Indian central bank’s action can only be taken as a move to please the US. However, India’s ministry of external affairs (MEA) has categorically denied media reports that RBI’s move is due to any pressure from a third country. This is not surprising since the MEA has of late been busy scanning critical media reports and dismissing them as unfounded.

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