mumbai 06 22, 2012, 14:10 IST
The Reserve Bank of India has discussed with state-run oil firms steering 50 percent of their dollar purchases via a single state-owned bank to smoothen volatility in the rupee, though no decision has been made, two oil executives said on Friday.
The potential move had been widely speculated in markets since the rupee began to drop to record lows against the dollar in May. Oil companies account for around $10-12 billion of dollar demand in domestic currency markets each month, according to HSBC.
Oil companies currently buy dollars through a competitive bidding prices via banks, and perceptions they are looking to buy dollars can lead to volatility and hurt the rupee.
"There is something being discussed. It may or may not be implemented. No decision has been taken yet," an official at a state oil company said.
A second source at a state-run oil company confirmed the talks and said no decision had been reached. Both declined to be identified because they are not authorised to talk to the media.
The sources said the discussions with India's central bank focused on steering 50 percent of their greenback purchases via a single state bank, while allowing them to meet the remainder of their dollar needs through the current bidding process.
A senior trader at State Bank of India
He added the bank had not seen any change in buying patterns from oil companies so far.
Traders said routing dollar purchase through one state-run bank would help reduce downward pressure on the rupee.
One dealer estimated the local currency weakens by 0.05 to 0.10 rupees to the dollar whenever oil firms call around for quotes.
Some analysts likened the RBI moves to measures taken by Indonesia's central bank to target currency volatility as a way to stem falls in its rupiah currency.
Indonesia's central bank said late last month it was looking at options to manage rupiah and dollar liquidity and has previously passed other directives such as one in September requiring exporters to return funds parked overseas to Indonesia.
"This is the modus operandi that Indonesia's central bank used and it was very effective in stalling the USD rally," said Suresh Kumar Ramanathan, a FX and rates strategist at CIMB in Kuala Lumpur.
"The supply of dollars via state owned banks will take off the pressure from INR to weaken. It's a positive move to arrest excessive weakening of INR," Kumar added.
On Friday, the rupee hit a record low of 57.32 per dollar, due to dollar purchases by oil and gold importers and because of a spike in global risk aversion.
Traders had previously expected the RBI to target oil companies' demand for dollars, with talk about potential measures such as creating a special window for dollar sales, though no measures have so far been announced.
The RBI has so far taken measures such as forcing exporters to convert half of their foreign exchange holdings into rupees or easing rules for using foreign currency deposits.
(Writing by Swati Bhat; Editing by Rafael Nam)
