As the rupee plumbs to record lows against the dollar, traders say the Reserve Bank of India could go beyond interventions and target dollar demand from oil companies, an approach that if done right may just help stem the rout.
Having proved unable to contain the rupee's falls via its actions in the FOREX markets, the RBI was widely reported to have met oil companies this week, and a look at the numbers shows why.
Forex dealers estimate average daily demand for dollars from state-run oil refiners at around $400-$500 million, with demand peaking towards the end of the month when they are supposed to make payments.
Targeting oil could succeed, but it will come down to how the RBI does it, traders say.
The RBI is widely seen to have two options: it could open a dollar window for oil companies to buy dollars directly from the central bank or it could purchase oil bonds via special market operations.
RBI opted for the latter in 2008 and then again in 2009 because oil companies back then were holding illiquid bonds. That helped the central bank both inject dollar liquidity and help the sector monetise its debt.
However, 2012 would be different. Oil companies no longer hold much outstanding oil bonds and traders see a far more effective approach if the RBI were to sell dollars directly to the sector.
"The direct dollar window to oil firms can help the rupee recover to around 53.80 per dollar. Oil prices have also come down by 10-15%. that will also help the rupee over the next 30-60 days horizon," a dealer in FX and rates at a private bank said.