Narendra Modi, Hassan Rouhani may discuss rupee investment mechanism today

Banking hurdles in way of rupee investment route

India’s plans to allow its nationals to invest in Iran using the rupee faces several hurdles. The lack of a proper banking channel, procedural complications and the looming threat of further sanctions against Tehran by the US might hold back Indian investments into Iran.

Media reports on Friday suggested that to circumvent tough trade sanctions in place against financial transactions with Iran, New Delhi has decided to allow rupee investments. Currently, Indians can invest using the rupee only in Bhutan and Nepal.

Senior government and industry sources said on Friday an announcement might be made on Saturday, when Prime Minister Narendra Modi meets Iranian President Hassan Rouhani.

The move, however, might not bear fruits owing to the absence of any banking channel between the nations. “Our banks are being ultra-cautious about what will happen if the US imposes some restrictions on financial transactions,” said Naushad Forbes, co-chairman of Forbes Marshall. “Korean, German, Japanese and Swiss banks, among others, have established connections and their companies are doing business in the country. It is high time India has at least a couple of Indian banks in Iran, so that an Indian firm is able to transact business.”

Uncompetitive labour and crippling sanctions have added to the difficult business environment, sources said. Investors have also been put off by the countrywide and month-long protests against the ruling regime in Iran. 

“There is a strong interest in investments into the petrochemicals, ports and railways sectors of Iran,” Ajay Sahai, director general of the Federation of Indian Exports Organisations, said. “This is because of the Chabahar port and project possibilities in the expanding Iranian railway system being sought by Rites, the engineering consulting arm of the Indian Railways. Indian oil companies are also looking to set up operations.” Senior government officials confirmed that on all these counts, discussions have been slow, while the Chabahar port is behind schedule.

On merchandise trade, both the governments have been in talks to find a way to put in place an old rupee trade mechanism, a senior government official said. As of now, oil majors prefer to do business through the euro, while smaller traders use the United Arab Emirates’ dirham.

After decades of sanctions, the Iranian market is considered to have significant growth potential, with a high appetite for consumption. 

Companies from apparel, engineering goods and other sectors are key to cash in on this.

“However, once we reached there, we saw prohibitively high import duties and the threat of further sanctions continue to exist,” Premal Udani, chairman of apparel manufacturer Kaytee India and past chairman of the Apparel Exports Promotion Council, said. “Iran is a relatively prosperous country due to oil receipts and has a large population with a huge demand for outside products, apart from providing the opportunity to access the wider Central Asian region.”

In 2015, after the Iran nuclear deal framework agreement was signed by Tehran and the five permanent members of the United Nations Security Council, Indian exporters had visited Iran to check out the consumer and industrial markets. 

While Indian exports of man-made textiles are slowly increasing, Indian companies have been unable to use the market access in pharmaceuticals, Sahai added. Official statistics showed Indian exports have reduced by more than 50 per cent over the past three years to $2.37 billion.