Meaningful Minutes

The deal:

Western nations like the US had accused the Iran about expanding its nuclear activities for making weapons. In February this year, sanctions were imposed on the country, which barred any flow of money into the Middle-eastern country through trade. The deal, finally agreed upon after lot of negotiations, eases curbs on Iran and allows it to get $4.2 billion from its overseas accounts if Iran restricts its nuclear activities.

Oil prices:

Iran is a key exporter of oil among the Organization of the Petroleum Exporting Countries (OPEC). The sanctions barred countries from importing oil from Iran. This had led to an increase in oil prices on fears of supply shortage. However, the deal now makes it easy for countries to buy oil. However, this is subject to conditions and additional exports from Iran are widely expected to start after a couple of quarters. Based on the positive sentiment post the announcement, prices of Brent Crude oil fell over $2 per barrel. But, they have since risen by $3 / barrel to $111 / barrel, as the real implications became clearer.

Impact on India:

Oil accounts for nearly 40% of India’s total imports. Any fall in international prices of oil helps reduce India’s import bill. This will narrow current account deficit – the amount India owes to the world in foreign currency. A fall in oil prices will also help rein in inflation.

Supplies to India:

Iran is a big supplier of oil to India. It was the second-largest supplier to India before the sanctions. India has had to slowly cut down its purchases. It is now the seventh biggest crude supplier to India. 7.2% of India’s oil imports were from Iran in FY13, according to government data. This is down from 10.5% in FY12.

Rupee:

Iran is also one of the few oil exporters which accept payments in rupees or euros. This eases pressure on the Indian currency. Oil importers are one of the largest buyers of dollars in India. Greater the demand for dollar, higher is the depreciation of the rupee, which fell to 68-levels in August this year. With the deal, India can buy more oil without paying in dollars. This also acts as a buffer from any fluctuation in international prices of oil.

RBI move:

The Indian refiners are expected to start payments to Iran in the coming few weeks. This prompted the Reserve Bank of India to extend its special forex swap window till end of December. The RBI had established the window to halt the rupee’s slide against the dollar.

Insurance:

An important part of the import procedure is insurance. This helps reduce risks for companies during the shipment. However, since the sanctions, private companies were finding it difficult to get insurance until the Indian government provided help. Now, the deal should bring down the cost of insurance. This reduction in costs could help improve profitability.