As rupee breaches 73 level, RBI allows OMCs to raise dollar from abroad

However, the announcement came after the market closure, after the rupee witnessed a sharp decline on news that the central bank had refused to open a dollar-swap facility for the OMCs

The Reserve Bank of India (RBI) on Wednesday allowed oil-marketing companies (OMCs) to raise dollars directly from overseas markets without a need for hedging. 

In a post-market notification, the RBI said the minimum maturity profile of the borrowings should be three years and five years, and the overall cap under the scheme would be $10 billion. The central bank relaxed criteria for this. 

For example, there was an individual company cap of $750 million, which the RBI did away with. Besides, any such funding required mandatory hedging. Now, they do not need to do that, provided the companies have a board-approved forex (FX) mark-to-market procedure and prudent risk-management policy, the RBI said in a notification on its website. 

The decision of the RBI was welcomed by OMCs.

“The move will open up a new line of credit for OMCs and will allow for better planning on the working capital side,” said a senior official from one of the three state-run OMCs. “This would provide more flexibility to borrowings and boost dollar inflows, calming the current volatility,” said M K Surana, chairman and managing director, Hindustan Petroleum Corporation. 

Earlier, OMCs were taking the external commercial borrowing (ECB) route for capital expenditure only. 

“For working capital requirement, allowing long-term ECB is a welcome development. They are keeping hedging options also open, giving enough room for us,” said A K Sharma, director (finance), Indian Oil Corporation.

However, the announcement came after market closure, after the rupee witnessed a sharp decline on news that the central bank had refused to open a dollar-swap facility for OMCs.

“The RBI’s refusal to open a special window led to a sharp decline in the rupee,” said V K Sharma, head, private client group and capital market strategy at HDFC Securities.

The oil-swap facility was much anticipated in the market, as that would have taken the pressure away from the market substantially. Annually, the dollar demand on oil count is $120 billion, or about $500 million, on a daily basis for every working day. 

Denial of such a facility predictably dampened market sentiment. The RBI’s latest facility for working capital loans would address some of the issues, but not fully. 

The oil prices are approaching $85 a barrel, and oil-importing countries will be particularly affected. The rupee closed at 73.34 a dollar, down from its previous close of 72.91. It has fallen more than 12 per cent so far this year and is the worst performing currency in Asia.

“We expect the rupee to trade between 73 and 73.5 levels till the RBI monetary policy meeting sets a new direction. The RBI announcements on liquidity are more focused towards providing relief to the NBFCs (non-banking financial companies) and banks, rather than cooling of the rupee in the FX markets,” said Salil Datar, chief executive officer of Essel Finance VKC Forex.

The rupee’s loss on Wednesday was particularly sharp, catching up with the sentiment of other Asian currencies on Tuesday. The Indian markets were closed on Tuesday. 

Currency dealers say the RBI intervened lightly in the market. “There was some intervention in the morning, but the RBI left after that. Nationalised banks bought dollars again towards the close,” said a currency dealer with a private sector bank.  The rise in crude oil prices can potentially upset the fiscal math of the government, which promised to keep fiscal deficit at 3.3 per cent of gross domestic product. These factors have resulted in a bearish sentiment in the bond market as well. The 10-year bond yields, which dipped below 8 per cent on Monday, jumped to a four-year high to close at 8.11 per cent, despite the RBI freeing up Rs 2 trillion worth of liquidity in the market, as well as announcing Rs 360 billion worth of secondary market bond purchases this month. The rupee’s loss was not echoed by other Asian currencies, as they had already bled on Tuesday. Philippines and South Korean currencies gained, whereas Indonesia, China, and Thai fell. The rupee’s fall was the sharpest at 0.59 per cent in the day. The dollar index, which measures the greenback’s strength against major global currencies, was marginally down at 95.49.

“It is difficult to say if the dollar demand is coming from OMCs, as it is just the start of the month. Typically, they come in the market in the middle of the month and increase the demand in the month-end,” said a currency dealer with a foreign bank.