Fearing that fresh US sanctions may block a six-month-old conduit used for paying for Iranian crude, India wants to pay its second largest oil supplier in rupees, the Times of India reported.
The issue is likely to figure prominently when a multi- disciplinary team visits Tehran on January 16 to discuss uninterrupted supply, a top government official said here.
India currently pays Iran about $1 billion every month through Turkey for the 370,000 barrels per day of crude oil it buys from the world's fourth-largest oil producer.
"There are chances that Turkey may come under pressure after a fresh round of US sanctions imposed on Iran," an official said.
Under the proposal, National Iranian Oil Co (NIOC) will open a rupee account with Indian banks and can use the money to purchase non-strategic items like railway imports and buying commodities. It cannot, however, use the money to invest in India or buy shares or companies.
A list of what Iran can do with the money and what it cannot is being prepared.
The official said the Reserve Bank of India, which had in December 2010, discontinued a long-standing mechanism of payment through central banks, had previously opposed payments for the Iranian oil in rupee.
India had in February last year started making euro payments through an Iranian bank based in Germany. But under US pressure, Germany soon stopped accepting money from India for onward transfer to Hamburg-based EIH Bank, sending India to the doorstep of Turkey.
Routing payments through Russia was discussed during the visit of Prime Minister Manmohan Singh to Moscow last month. However, Russia is not keen due to the "complexities" involved.
US President Barack Obama signed a Bill into law late last month empowering US authorities to impose penalties on foreign banks dealing with the Central Bank of Iran to settle oil import payments.
National Security Adviser Shivshankar Menon on Thursday chaired a meeting of officials from the ministries of finance, petroleum and external affairs and the Reserve Bank after indications from Turkey's state-run Halkbank that it would have to stop settling payments on behalf of Indian companies.
The official said a preparatory meeting would be held in the oil ministry this week.
New Delhi, however, sees no supply disruptions unless the Strait of Hormuz is closed.