India is exploring a tried-and-tested option of opening a window for oil marketing companies (OMCs) to buy US dollars directly from the Reserve Bank of India (RBI) in order to arrest the rupee’s slide.
In this regard, the finance ministry has asked Indian Oil Corporation — the largest OMC — to prepare a report on behalf of itself as well as Hindustan Petroleum and Bharat Petroleum, said sources.
The country’s oil import bill is facing a double whammy as crude oil prices in the international markets are going up mainly because of concerns arising from US sanction on Iran which kicks in on November 4, and the rupee is weakening against the US dollar. Since the start of financial year 2017-18, while the rupee has depreciated more than 11% against the dollar, the Indian crude oil basket has become expensive by 5%.
The mechanism to allow OMCs to buy dollar from RBI directly — rather than from the open market — was adopted in 2013 as well when oil prices in the international market crossed $100 per barrel and the rupee was trading at 68 against the dollar. “There is always a chance to start it again. It works for the OMCs and also contains currency volatility,” said one of the sources. Direct purchase of dollars from the central bank will help reduce demand for the greenback in the open market which fuels rupee’s decline.
Despite India trying to cut it dependence on imports for its energy needs to 50% by 2030, both the quantity of crude oil imports and the import bill have been consistently going up. While India’s total imports grew 17.34% in April-August 2019 to $216.43 billion compared with $184.45 billion a year ago, oil imports grew 53.55% to $58.81 billion.
Meanwhile, India’s dependence crude oil imports has gone up from 78.3% in 2014-15 to 82.8% in 2017-18, according to data from the Petroleum Planning and Analysis Cell.
“Suggestions are being taken (from OMCs) to suggest ways to handle the situation,” said the source quoted above, adding the RBI dollar window mechanism is one of the options being discussed along with many others to cushion against depreciating rupee and hardening crude oil prices.
India is also keeping the option of paying Iran in rupee terms after US sanctions kick in, a payment mechanism similar to the one which prevailed during the last instance of sanctions (till 2015). India imports around 10% of its crude oil requirement from Iran. For 2018-19, India had planned to import about 25 million tonnes of crude oil from Iran, up from the 22.6 million tonnes imported in 2017-18.
Earlier this week, India’s state-run refiners said they have decided to reduce their crude oil imports and use more of their inventories in a bid to curb the rising foreign exchange outflows.
While reduced imports per se would not lead to a softening of domestic fuel prices (the local prices are determined according to a formula that integrates export and import prices of the products), it would curb dollar and other foreign currency outflows at a time India is experiencing net portfolio outflows and pressure on the current account deficit. Also, reduced demand from India, the world’s third-biggest importer of crude, could have a sobering effect on global prices. This was also one of the mechanisms used during 2013.
Source: financialexpress.com