The RBI’s move late on Wednesday to open a special dollar window for oil marketing companies seems to have done what its earlier initiatives did not — stem the rupee’s fall. The rupee gained 3.2 per cent against the US dollar on Thursday.
Under the forex swap window, the central bank will meet the entire daily dollar requirements of the three public sector oil marketing companies — IndianOil, HPCL and BPCL. This will enable these companies to buy US dollars directly from the RBI in exchange for rupees for a fixed period. At the end of the period, there will be a swap — the oil companies will sell dollars to the RBI and in turn get back the rupees.
The expectation is that by keeping the oil companies — the big dollar guzzlers — out of the forex market, the current pressure on the rupee can be eased.
But how much dollar demand will the RBI’s latest move curb? In July, India imported crude oil worth around $12.7 billion — a little over a third of the country’s total imports of $38 billion. Public sector oil companies accounted for around 56 per cent of the crude oil imported into the country last year. This means, RBI’s special window could have reduced the monthly dollar demand by around $7 billion. At $113 a barrel, the Indian crude oil basket currently costs around 8 per cent more than it did in July. So, dollar demand could reduce by around $7.7 billion a month — not an insignificant amount when the going is tough.
No surprise then that the market cheered the RBI’s move and gave the beleaguered rupee a leg-up.
But how will oil companies pay back these dollars? The unsaid assumption is that in the coming months, dollar supply will improve — allowing oil companies to buy and hand over the dollars to the RBI in exchange for rupees. What if the dollar supply remains tight? Reports suggest that in such a case, the RBI may rollover the deal — that is, it may extend the period of the swap, giving oil companies more time to exchange dollars for rupees.
Earlier in July, the RBI had directed the public sector oil companies to buy their dollar requirements from a single public sector bank, instead of seeking multiple quotes from different banks. This was meant to reduce volatility in the currency. The latest move goes a step forward, removing a major source of dollar demand from the market.
This is not the first time the RBI has resorted to a ‘special window’ for oil companies. In 2008, the central bank had resorted to this measure when the rupee had come under pressure in the wake of the global financial crisis.