RBI shuts forex window for oil firms as rupee stabilises

Banks' overseas borrowings, FCNR (B) swap window fetch $34 bn

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Encouraged by the rupee’s stability, the Reserve Bank of India (RBI) has withdrawn the special window made available to oil companies to source their dollar requirements. The window was introduced in September, following the sharp depreciation of the rupee against the dollar.

“Volatility in the domestic foreign exchange market has diminished in the last few weeks. Beginning last week, public sector oil marketing companies (OMCs) have started accessing the foreign exchange market for their entire daily dollar demands,” the central bank said in a statement on Monday.

While RBI has advised OMCs to smoothen their daily dollar requirements, it has said it would consider reopening the window on “rare days”, if there was a sudden spurt in demand.

ON THEIR OWN

• RBI has said it would consider reopening the window on ‘rare days’, if there was a sudden spurt in demand
• Apart from covering in forward markets, OMCs have been advised to use revolving lines of credit offered by banks
• Any fund raised from FCNR deposits or banks’ borrowings will now flow directly into the market

“Going forward, the OMCs have been advised to smoothen their daily dollar demand, so that the coming bunched-up demand on any particular day is covered in advance in the forward forex market, or covered on days of low demand. Apart from covering in forward markets, the OMCs have also been advised to use the revolving lines of credit made available by banks with the specific objective of tiding over humps in dollar demands,” RBI said.

The head of treasury of a mid-sized state-run bank said, “The dollar demand of oil marketing companies coming into the market will create pressure on the rupee. However, since RBI can attract dollar flows with various measures, it will ensure the rupee does not weaken sharply from current levels. Going forward, any new funds raised from FCNR (foreign currency non-resident) deposits may not be much because converting these funds into rupees and buying forwards will be a costly affair for banks.”

Last week, RBI had extended the liberal interest rates regime by two months for incremental non-resident Indian fixed deposit schemes such as non-resident (external) rupee, or NRE, deposits and ordinary non-resident (NRO) accounts. Banks are allowed to offer higher interest rates on incremental NRE deposits with a maturity period of more than three years.

After falling 27 per cent against the dollar during the April-August period, the rupee rebounded in the following months. So far, it has appreciated 9.5 per cent, after hitting an all-time low of 68.83 a dollar on August 28. The currency’s sharp fall had prompted the central bank to initiate a series of measures, including announcing a special window for oil companies and steps to attract inflows to bring back stability in the foreign exchange market.

On Monday, the rupee closed at 62.32 a dollar, compared with its previous close of 62.45 a dollar. It opened at 62.34 and, during intra-day trade, touched a high of 61.97 a dollar. Currency dealers said there was dollar demand in the market from oil marketing companies, but the rupee strengthened owing to RBI’s intervention in the foreign exchange market.

According to RBI, the swap windows for FCNR(bank) funds and banks’ foreign borrowings have mobilised $34 billion. “Since the RBI swap windows are now closed, going forward, any funds raised from FCNR deposits or from banks’ borrowings will flow directly into the market, instead of to RBI’s forex reserves,” RBI said.

The central bank had raised banks’ foreign borrowing limit from 50 per cent of unimpaired tier-I capital to 100 per cent. Additionally, banks could swap such borrowing with RBI at a concessional rate of 100 basis points below the ongoing swap rate in the market. The facility was done away with on November 30.