RBI came to save the falling rupeeImage Credit source: ai generated
Iran war and skyrocketing prices of crude oil have created turmoil in the Indian currency market. This year, the Indian rupee has been under the most pressure among the major currencies of Asia. There has been a huge decline of more than 3 percent in its price. When the rupee weakens, all goods imported from abroad become expensive. Since India imports most of the oil it needs, the weakness of the rupee directly leads to inflation in petrol and diesel. Sensing this danger, the Reserve Bank of India (RBI) has now started direct intervention to support the rupee.
‘Plan’ to rescue the rupee from its decline
In the last week of March, the situation had worsened so much that the price of one dollar had crossed the historical low of Rs 95. Continuous withdrawal of money from the market by foreign investors and expensive oil bills had deepened this crisis. According to market sources, to handle the situation, RBI has now reactivated the emergency measures which were first tried in the initial phase of Ukraine war. The central bank has strongly asked the country’s major government oil companies to immediately stop purchasing dollars directly from the spot market.
New ‘route’ of foreign exchange for government oil companies
Companies like Indian Oil Corp (IOC), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) control about half of India’s total refining capacity of 5.2 million barrels per day. These companies are the biggest buyers of dollars to pay oil bills from abroad. When they directly enter the market and buy huge quantities of dollars, the pressure on the rupee increases unexpectedly. To eliminate this pressure, these companies have been asked to avail a special credit line (loan facility) through State Bank of India (SBI). SBI is the country’s largest and government-backed bank, which already manages large business transactions. By meeting the foreign exchange requirement through this, the impact on the open market will be reduced to a great extent.
Are things back on track?
According to a news in Economics Times, refineries are being encouraged to meet their daily dollar demand only through SBI instead of different banks. Companies now have the option to either buy dollars at the reference rate decided by the RBI or use this special credit line. Along with this, RBI has also sold dollars from its foreign exchange reserves in the market. Arbitrage traders who create unnecessary volatility in the market have been cracked down on and banks have been completely barred from entering into ‘non-deliverable forward contracts’ with corporates.
The effect of these strict measures is now clearly visible in the market. Traders trading in foreign exchange have also admitted that dollar purchases by oil companies in the spot market have decreased to a great extent in recent times. This exercise of RBI, which has been going on for the last two weeks, has given a big boost to the rupee. From its lowest level, the rupee has now strengthened by about 2% and on Thursday it was recorded at the level of 93.20 per dollar.
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