RBI Instructs State Oil Companies to Reduce Dollar Purchases, Utilize Credit Facility
The Reserve Bank of India has issued a directive to state-run oil refiners, urging them to significantly reduce their spot dollar purchases and instead utilize a special credit line for their foreign exchange requirements. This strategic move is part of a broader effort to alleviate mounting pressure on the Indian rupee, which has been experiencing notable depreciation. According to a Reuters report, the central bank has specifically asked refiners to access this facility through the State Bank of India, effectively reviving a measure previously employed during the Ukraine war to manage currency volatility.
Addressing Rupee Weakness Amid External Pressures
A combination of surging global oil prices and substantial foreign portfolio outflows has significantly weakened the rupee, making it the worst-performing major currency in Asia this year. The currency has declined more than 3% in 2024, hitting record lows against the US dollar. By encouraging refiners to draw on the credit line rather than purchasing dollars directly from the spot market, the RBI aims to reduce immediate dollar demand. This is crucial because oil refiners are among the largest buyers of US currency in India, primarily for financing crude oil imports.
The facility is available to three major state-owned refiners: Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation. Collectively, these companies account for approximately half of India's total refining capacity, which stands at about 5.2 million barrels per day. Their consolidated foreign exchange activities have a substantial impact on the domestic currency market.
Operational Changes and Market Observations
In addition to utilizing the credit line, refiners have been encouraged to route their daily dollar purchases exclusively through the State Bank of India, rather than using multiple banking channels. This consolidation of foreign exchange flows is intended to minimize the overall market impact and provide greater stability. According to sources, refiners now have the option to either purchase dollars at the RBI's reference rate or draw directly from the credit line to meet their forex needs.
Independent spot foreign exchange traders, separate from the sources cited in the report, have corroborated these developments. They noted a noticeable decline in oil companies' activity in the spot market over recent days, suggesting that the measures are already being implemented. The RBI and SBI have not officially commented on the directive, and the refiners involved have also remained silent on the matter.
Context and Recent Currency Performance
These measures, which sources indicate have been in place for approximately two weeks, come as the Reserve Bank of India intensifies its efforts to support the rupee amid ongoing geopolitical tensions, including the conflict involving Iran. The rupee had weakened past 95 per dollar in late March but has since recovered about 2%, thanks in part to proactive steps by the central bank. These interventions included selling dollars from India's substantial foreign exchange reserves to stabilize the currency.
As of Thursday, the rupee was last quoted at 93.20 per dollar, reflecting a modest recovery. The RBI's latest directive underscores its commitment to managing currency volatility and ensuring macroeconomic stability, particularly in the face of external shocks that affect India's trade balance and capital flows.
