Market expects a special dollar swap facility for oil marketing companies

The need to open a special dollar swap facility for state-owned oil-marketing companies (OMCs) is one of the measures that could be announced in the coming days after discussions with the oil ministry. 

In such a facility, OMCs will source dollars directly from the Reserve Bank of India (RBI) instead of going to the market. This takes the dollar demand from OMCs out of the foreign exchange (forex) market. They account for a majority of the demand in the forex market.

Notably, in August, the rupee slid heavily as oil prices zoomed and the demand for the dollar spiked among OMCs. The rupee moved from 68.43 a dollar at the start of August to 70.995 at the end of the month, largely due to oil demand and defence-related dollar purchases. 

The central bank had last opened the facility in August 2013, when the rupee had come under pressure due to taper tantrum after the US Federal Reserve had said it would scale down its bond-buying programme. By December of that year, OMCs were funnelling their entire need from the markets, without disrupting the exchange rates. 

The same could be introduced this time around, said market participants, but the work has not yet begun. Finance Minister Arun Jaitley said late on Friday there would be a number of measures to be announced after discussions with the ministries. He didn’t elaborate on the measures, fearing wide market speculation. 

A treasury head of a large public sector bank said the facility was like a standard procedure in the present kind of scenario. Even as OMCs source their dollars from the RBI, banks are also actively present to help the OMCs operate in the forward market. Besides, they open a special revolving facility for OMCs, keeping the dollars reserved for the oil companies should they need it. However, the proposal was not in the works till Saturday at the RBI, a source said.

“We have not received any official communiqué so far. There may have been discussions on the same,” said a senior official from one of the three public sector OMCs. 

Even as the OMCs sourced most of their dollars from the market, the RBI continued to support them. The central bank introduced a graded mechanism to ease oil-related pressures from the market. 

The RBI had advised the OMCs to “smoothen their daily dollar demand, so that the upcoming bunched-up demands on any particular day is covered in advance in the forward forex market or covered on days with low demand” in 2013. 

Apart from covering in the forward market, the companies were also advised to utilise the revolving lines of credit made available by banks.

The central bank also kept open its swap window for the OMCs “on the rare days when there was a pronounced spurt in the dollar demand in the currency market”. 

With inputs from Amritha Pillay