RBI goes aggressive in defending rupee, to sell dollars via Indian Oil, HPCL, BPCL oil bills

From Monday, October 12, the Reserve Bank of India announced it will sell US dollars through designated banks to Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation to meet their entire daily dollar requirements. The facility will continue until further notice.

All of this seems to be part of the apex bank’s wider commitment to save a falling rupee as well as cushion the impact of crude oil price hikes on the larger market conditions.

Why open the window now?

To this question, all the RBI says is that the action is “on the basis of assessment of current market conditions”. The apex bank did not clearly identify a trigger, and it did not set a rupee target or a limit or price for the dollar sales.

But the writing on the wall is pretty much clear—an acute pressure from the double effect of a rising oil bill and the sliding rupee.

So instead of buying dollars on the open market, which could add more pressure to the currency, the apex bank will provide these oil companies with dollars directly from its forex reserves.

When the oil companies’ demand on the spot forex market goes down, the RBI hopes it will dampen volatility. But that also means a marked depletion in dollar reserves.

At the end of Friday’s trading session, the Indian currency closed at 96.71, appreciating by 17 paise. As per recent RBI data, India’s forex reserves stood at around $734.6 billion on October 2, falling almost $13 billion that week from $747.6 billion on September 25.

The RBI recently also tightened rules for rupee-linked foreign-exchange derivatives, including restricting the rebooking of cancelled contracts and lowering the threshold for certain transactions without underlying exposure.

All of it points to managing demand and improving discipline in the spot market. And it came at the heels of the recent Monetary Policy Committee decision to raise the repo rate by 25 basis points to 5.50 per cent.

The latest move to provide oil companies with dollars could also be part of this “calibrated tightening”. Higher oil prices can add to inflation and import costs. Therefore, securing a predictable dollar channel for the oil companies might help cut down on a bit of pressure in the market.

What it can and cannot do

The three OMCs will now have a dedicated route to meet their dollar needs. This could free up and ease some spot-market demand and reduce uncertainty around payments for imported crude. But it is not this one-stop solution for an expensive oil-import bill.

India will still have to pay for the same imports, and the facility does not shield refiners, consumers or the balance of payments from the underlying cost of higher crude—the elephant in the room.