NEW DELHI – India has begun using its currency to purchase Iranian oil. The move is part of New Delhi's effort to bolster exports to the Middle Eastern nation.

After tightening U.S. sanctions made it difficult for New Delhi to pay Iran for oil in dollars, Tehran agreed to accept nearly half the payment in Indian rupees.

The arrangement became operational recently. Rafique Ahmed with the Federation of Export Organizations of India says it will give a major boost to trade between the two countries as Tehran will have to use the rupees it earns from Indian oil companies to buy goods from New Delhi.

“The oil companies have started to put the money in the rupee account and the flow of trade has started. They have deposited about $550 million,” said Ahmed. “They are expecting more flow of money to come in.”

Iran has been scouting for goods to buy with the Indian currency. In May, an Iranian trade delegation visited New Delhi to identify potential imports.

India mostly sells rice, sugar, pharmaceuticals and medical equipment to Iran. New Delhi is also considering selling wheat from its overflowing stocks. Indian traders say Iran could potentially become a big market for items such as tea, yarn, fabric and fertilizers.

Vijay Setia, the head of the All India Rice Exporters Association says some Indian exporters had faced uncertainty about payments in recent months, but those worries have been eased since an Indian bank began issuing lines of credit (LC) for exports to Iran.

“This is a sure payment – that you will get your payment,” said Setia. “And, confidence of bank LC is definitely there and business is safe now, in a safe mode. They are feeling more secure.”

He says rice exports to Iran had slowed down. But he expects more rice to go to Iran in the coming months.

In a bid to encourage exports to Iran, India has also put in place tax incentives for its traders.

Indian exports to Iran reached some $2.5 billion in 2010. But they will have to nearly double to about $5 billion if Tehran is to use up the rupees to be paid for the Iranian oil.

India has cut down on oil purchases from Iran following pressure from the United States, but it still procures about 12 percent of its requirement from Tehran. India, along with countries like China, has said it will abide by United Nations sanctions and not follow those imposed by Western countries.