InvestorQ : Why does the RBI want IOC, BPCL and HPCL to stop buying spot dollars?
sarah Leo made post

Why does the RBI want IOC, BPCL and HPCL to stop buying spot dollars?

Rashi Mehra answered.
1 month ago

Clearly, the RBI is worried that too much of spot dollar buying the oil refiners is leading to pressure on the Indian rupee. Here is what the RBI is worried about. India imports nearly 85% of its daily crude oil needs and most of that is done by the PSU oil refiners. Crude accounts for nearly 50% of the total merchandise trade deficit each month. When they import crude, they are required to pay in US dollars. Now, these dollars have to be bought by oil companies for which they resort to spot dollar buying. They normally rush to buy dollars when rupee is weakening, so it puts further pressure on the rupee value.

If the oil companies are buying spot dollars, then this demand is being met by the RBI selling dollars. That is having negative repercussions. When RBI sells dollars in the spot market, it depletes its forex reserves, which explains why the level of the forex reserves chest in India has fallen rapidly from $647 billion in the last quarter of 2022 to just $537 billion today. That is a lot of currency chest depletion of $110 billion for a country that is a net importer with a monthly trade deficit of $30 billion. If the spot dollar buying can be reduced by the oil companies, then the pressure on rupee automatically comes done.

As a result, RBI wants that instead of buying spot dollars in the open market, oil refining companies should rely on the special credit line that has been made available to PSU oil refiners. This limit of $9 billion has been already made available through the international branches of scheduled commercial banks. RBI wants the PSU refiners to tap this line of credit since it is at extant rates, so not too expensive. This facility is offered by State Bank of India, Canara Bank, Bank of Baroda, Axis Bank and PNB. It is hoped that this would largely reduce the pressure on the Indian rupee. We have to just wait and see how it evolves.