NEW DELHI India will send a delegation to Iran this month to explore boosting exports to smooth use of the restricted rupee currency, which the two sides have agreed to use for 45 percent of New Delhi's $11 billion (6 billion pound) a year oil bill, sources told Reuters.
India is currently paying Iran for the oil through Turkey's Halkbank after a previous mechanism was closed 13 months ago, but fears that route may also succumb to international pressure.
The United States slapped fresh sanctions on Tehran from the start of this year, targeting financial institutions that deal with the central bank, hoping to stem oil revenues and persuade Iran to abandon a suspected nuclear weapons programme.
The European Union followed with a ban on Iranian oil this week that is expected to take full effect within six months.
India is Iran's second-biggest oil client after China but its own exports to the Islamic nation are worth only about $2.7 billion according to latest figures from the commerce ministry.
The two sides have resorted to the rupee as a possible means of payment for 45 percent of oil dues, a government source said, but this would give Iran large amounts of a currency which is difficult to use for international trade.
"India is looking at project exports and services on top of current exports to fix the trade imbalance as the rupee is not fully convertible," said the source, adding the federal trade ministry is working out the details.
The Indian team would visit Tehran at the end of this month.
India could also step up exports in a range of goods, including farm products such as wheat, industrial goods and gems and jewellery, a senior government official said, who did not wish to be identified because of the sensitivity of the subject.
"You have to devise a mechanism with which you can pay for the import of oil and avoid attracting sanctions," the official said. The two sides are looking for a stable payment mechanism avoiding the involvement of financial institutions which have interests in Europe or the United States.
He added that a business delegation would go to Iran, taking potential exporters.
"Traditional exports on the food category, which have always gone to Iran, have been orthodox tea and basmati rice. So those will continue. We are now told that there is also a demand for wheat and other items," the government official added.
Wheat sales from India could benefit both sides, as Iran now faces problems with imports under the new European Union sanctions.
About 400,000 tonnes of grain has been held up on at least 10 ships outside Iranian ports for as long as three weeks, trade sources said.
For India, the world's second-biggest producer of wheat, exporting the grain to Iran could benefit local farmers and traders, who have struggled to sell output overseas as international prices have been too low.
But the government official said it would be for individual traders to strike deals. Payment details may also need clarification.
"It's certainly a great opportunity to export wheat to Iran but the need of the hour is to find out a suitable payment mechanism," said D.P. Singh, president of the All India Grain Exporters Association.
The rupee route is currently a backstop, one refiner said.
"It is a fact that central bank of Iran has opened an account with UCO Bank but we are not using that. As of now all our payments are going through Turkey. UCO Bank route is our Plan B," said an executive at one of the state-run refiners.
Five Iranian private banks -- Bank Parsian, Pasargad, Saman, Sarmaye and Karafarin Bank which are free from the sanctions imposed on all of Iran's state-owned banks -- will also open account in UCO Bank, the government source said.
"Indian refiners will deposit money in Iran's central bank account in UCO bank, which will then transfer the money from the central bank's account to the account of the five private banks for further releasing the money to Indian exporters," the government source said.
India's foreign secretary will travel to the United States from February 6-8 for regular bilateral talks where the issue of payments for Iranian oil could come up, a foreign ministry official said.
(Reporting by Matthias Williams and Nidhi Verma; additional reporting by Ratnajyoti Dutta and Satarupa Bhattacharjya; editing by Krittivas Mukherjee and Jo Winterbottom)