Under previous Western sanctions, India had devised a barter-like scheme acceptable to Washington that allowed it to make some oil payments to Tehran in rupees through a small state bank, UCO Bank (UCBK.NS).
Indian companies were then able to receive payments for goods exported to Iran using the oil money held in non-convertible rupee balances at UCO, maintaining a trade lifeline between two countries with long historical ties.
But since sanctions were partly lifted early last year following a landmark nuclear deal between Tehran and world powers in 2015, the rupee account has been run down by more than 90 percent to just 20 billion rupees ($305 million) because Indian refiners have resumed paying for Iranian oil in euros.
"We are working on a mechanism through euros and looking for a common correspondent bank in Europe to act as an intermediary for India and Iran," said R.K. Takkar, chairman of UCO Bank.
"The euro payment system has not yet crystallized," he said, adding the government was working to find a solution.
The Reserve Bank of India (RBI) said some Iranian banks had applied to open branches in India, but gave no indication when it might approve settlement of trade with Iran in currencies other than the rupee.
"Due to the geopolitical situation around Iran, and international sanctions-related measures, correspondent banking relationships are difficult," the central bank said in a written reply to questions submitted by Reuters.
"The Reserve Bank has facilitated payment for Indian exporters by permitting special arrangements for rupee-based settlements."