MUMBAI - India's soymeal sales to Iran are set to spike as the oil producer uses the rupees it receives for its crude exports to cover its animal feed demand amid U.S. sanctions that have crimped the country's ability to import necessities.

Iran has agreed to sell crude oil to India, the world's third-largest oil consumer, in exchange for rupees after sanctions imposed by the United States blocked its access to the global financial system.

The oil-rich country must spend those rupees on Indian goods and Iran does not produce enough of the protein-rich soymeal domestically. Higher meal exports will support Indian soybean prices NSBc2 and limit the complaints from farmers that had demanded relief from low prices from the government, which faces elections by May.

India's soymeal exports to Iran could jump to 450,000 tonnes during the 2018/19 fiscal year ending in March, up from just 22,910 tonnes during the previous fiscal year, B.V. Mehta, executive director of the Solvent Extractors' Association (SEA), a Mumbai-based industry body for oilseed processors, said this week.

Exports could rise to 500,000 tonnes during the next fiscal year if the sanctions remain, he added.

"Iran has started buying aggressively due to the sanctions and it seems demand will remain there in coming months," said Mehta.

India started paying Iran for oil imports in rupees after receiving a six-month waiver from the sanctions that started in November. urn:newsml:reuters.com:*:nL3N1Z9260

India wants to continue buying oil from Iran since it offers free shipping and an extended credit period, while Iran will use the rupee funds to mostly pay for Indian exports.

Iran is paying a premium of as much as 10 percent compared to other buyers since the country was struggling to secure soymeal from other sellers and keen to use oil payments, said an exporter based at Indore in central Indian state of Madhya Pradesh.

"We have to charge a premium as many times payments get delayed," he said.

During the previous U.S. sanctions, India settled 45 percent of its Iranian oil payments in rupees and the remainder in euros. But this time New Delhi wanted to make all payments in rupees to reduce its trade deficit with Iran.

Local soybean prices have jumped 10 percent in just three weeks as oil mills started procuring the oilseed to fulfill the export orders for Iran.

However, soymeal prices have also jumped and made Indian exports less lucrative for traditional buyers such as South Korea, Thailand, Vietnam and Bangladesh.

Indian soymeal was available at about $400 per tonne on a free-on-board (FOB) basis, compared to $330 for South American supplies, said a Mumbai-based dealer with a global trading firm.

"In coming months Thailand and Vietnam are likely to switch to Brazil and Argentina. Their supplies are cheaper even after factoring in higher freight cost," the dealer said.

Still, India's soymeal exports could jump 35 percent in the 2018/19 fiscal year to 1.6 million tonnes, estimates the SEA's Mehta.

(Reporting by Rajendra Jadhav; editing by Christian Schmollinger) ((rajendra.jadhav@thomsonreuters.com; +91-22-6180-7153 ; Reuters Messaging: rajendra.jadhav.thomsonreuters.com@reuters.net))