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THE Reserve Bank of India (RBI) has moved to support the rupee by starting special market operation(SMOs) enabling PSU refiners to convert their oil bonds into dollars. In the course of a SMO RBI buys the bonds and provides equivalent forex exchange to oil companies through banks.
RBI has been purchasing oil bonds from public sector refiners such as IOC, BPCL and HPCL since last week. A market source said that oil bonds worth Rs 2,500 crore have been purchased by RBI, with BPCL having sold Rs 800 crore and IOC around 1,500 crore worth of bonds.
Since the SMO is what is known as an off-market transaction, it imparts both liquidity to the oilcos and overall financial stability by providing dollars to the oil majors, who otherwise would have had to tap the forex market. Under the current circumstances, huge dollar demand by oilcos could further worsen the fall in the already struggling rupee.
The rupee has depreciated by 6.35% against the greenback in the calendar year to date, having hit a low of 52.18 to the dollar on March 3. The rupee’s fall is attributable to the unprecedented strength in the dollar relative to other currencies and continuing outflows from India.
The outlook for bonds too has worsened in the past few weeks with the government announcing extra borrowings from the market, increasing their supply. The same traders who were falling over each other to purchase quasi government bonds (like oil bonds in the hope that yields would fall) are now waiting for a chance to exit the market. This has meant that there is no appetite for oil bonds in the market, other than from RBI, LIC and provident fund trusts.
The RBI permits the oil companies to sell bonds to the extent of their import requirement. “We have so far received Rs 15,000 crore worth of bonds in the firstthree quarters of the current fiscal, while Rs 2,000 crore are receivable,” said SK Joshi, director (finance), BPCL.
“However, we can’t just offload whatever we wish to under the SMO. RBI permits us to sell bonds to cover our import requirements,” he said. SV Narasimhan, director (finance), IOC, said that the refiner had outstanding oil bonds worth Rs 30,000 crore at the beginning of March.
In the first leg, RBI buys the bonds and provides equivalent forex exchange in off-market deals to oil companies through banks Since SMO is an off-market transaction, it gives liquidity to the oil companies and overall financial stability by providing dollars to the firms Oil cos would otherwise have had to tap the forex market, weakening the Rupee.