To stabilize the Indian rupee, the Reserve Bank of India (RBI) has asked state-controlled oil refiners to restrict their purchases dollars in the spot market and rather, use a special credit facility channeled through the State Bank of India (SBI). This comes amid Indian rupee being under pressure following the rise in crude oil prices and continuous foreign capital outflow.
Oil firms are among the biggest buyers of dollars in the domestic market due to India’s reliance on imports of crude oil. Under the directive, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation have been asked to buy the dollar via SBI.
The rupee has fallen over 3% year-to-date, momentarily declined below Rs. 95 per dollar in March, which makes it one of the worst-performing major currencies in Asia. The high oil prices and geopolitical uncertainties around the Strait of Hormuz were major factors that influenced the depreciation.
Within the new framework, refiners have been requested to channel their foreign exchange needs to State Bank of India which will avail to them a structured credit line. This minimizes the amount of large immediate dollar purchases in the open market.
The total of these oil PSUs contributes around 50% of the total refining capacity of 5.2 million barrels per day in India and thus, the forex activity of most of these PSUs is crucial. Centralizing their dollar demand by using SBI, the RBI wants to iron out the volatility and visible tensions in the currency market.
The directive reportedly has been in place for around two weeks and the initial signs are that there is a reduction in the spot market purchase of dollars by these companies.
The interference of the RBI has provided some relief. The rupee has been on a downward spiral, but recently rose around 2%, trading at near Rs. 93.20 against the dollar, and moving toward a new level of 92.95.
Besides this, the central bank has been continuously selling dollars in its reserves and increasing supervision on speculative currency transactions to favor the domestic currency.
Also Read: RBI Proposes New Safeguards to Curb Surging Digital Payment Fraud
This action is part of a wider policy to deal with external weaknesses without disrupting the market. The RBI plans to reduce volatility by diverting bulk, consistent dollar demand off the spot market, while keeping the necessary imports of goods such as crude oil liquid.
The strategy can be associated with trade-offs. Transacting operations via a centralized process may also incur differences in prices or extra expenses for refiners compared to open market rates.