Reuters had reported large lenders are reluctant to process direct rupee trade transactions with Russia for fear of becoming the target of sanctions over the invasion of Ukraine, and New Delhi is counting on smaller banks like UCO and Yes.

Banks are discussing the currency pair for the payment mechanism and the options include the Indian rupee paired with the Russian rouble or Saudi Arabia's riyal, the official said.

"Few of the Russian banks are joining hands with UCO Bank and Yes Bank. It will be primarily rupee-basis trade, could be rupee-rouble or could be rupee-riyal," the official, who did not want to be named, told reporters in New Delhi.

The official did not explain how the rupee-riyal mechanism will be designed to settle trade between New Delhi and Moscow.

(Reporting by Shivangi Acharya; Editing by Stephen Coates)

By Shivangi Acharya