Banks seen buying more $ for oil firms on heavy inflow days

Move intended at reducing volatility in the rupee

In a bid to minimise the volatility of the rupee amid demand from oil marketing companies (OMCs), state-run banks are seen mopping up dollars on days when foreign fund inflows are high, and vice versa.

Following the rupee volatility during May-August last year, the Reserve Bank of India (RBI) had opened dollar-swap windows for oil marketing companies to stem the weakness. OMCs’ dollar demand for repayments of swaps was seen in February-March, which was to be in the region of $7 billion.

By estimates of currency dealers in state-run banks, the dollar demand of these public sector OMCs are in the range of $6-7 billion a month. “Public sector banks are buying dollars for OMCs.

They are mostly doing this at times when custodian flows are coming to the market. Public sector banks are doing this quite openly whenever dollar flows are hitting the market,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

A currency dealer with a state-run bank agreed about this arrangement. “On days when there are ample dollar flows, the state-run banks buy heavily and they slow down their buying on days with thin dollar flows in domestic markets,” he said. As a result, the rupee has been range-bound, even if oil demands are being met by the banks.

In August 28, after market hours, RBI had introduced the forex swap window for the OMCs. That is because earlier that day the rupee had touched an all-time low of Rs 68.85 to the dollar. The window was open till November 30 post which these OMCs started meeting their requirements directly from the market. In the post-monetary policy conference call with analysts and researchers, RBI Governor Raghuram Rajan had assured the Street the re-payments for the swaps that would come by end-March are well covered. “Between end-February and end-March about 50 per cent of oil swaps will come due and beyond that another 50 per cent. At this point, I can say at least the re-payments for March are well covered,” said Rajan.

On December 18, in yet another post-monetary policy conference call, Rajan had told public sector OMCs had net repayment liabilities of less than $7 billion for their swap arrangements with RBI.

“Net amount of forex swaps with OMCs is less than $7 billion. That is approximately what will have to be repaid over time. As and when the time comes, we will take a view on how the repayment will happen and how it can be settled by way of exchange of two-three funds based on the settlement amount. The swaps could be rolled over if necessary. If market conditions permit, it can also be repaid,” said Rajan.

On Monday, the rupee ended at Rs 62.44 compared with previous close of Rs 62.29 per dollar.