For a country that pays for its oil in dollars, a falling rupee is a slow tax on everything. Fuel, freight, fertiliser. On Saturday, the Reserve Bank of India admitted how serious the slide has become: it opened a special RBI dollar window for the country’s three biggest oil importers, the kind of emergency-style measure it reaches for only when the currency is under real strain.
The RBI announced that from Monday, October 12, it will sell dollars directly to Indian Oil, Hindustan Petroleum and Bharat Petroleum through designated banks, meeting their entire daily dollar requirement until further notice, according to the central bank’s statement reported by CNBC-TV18 and Business Today. The RBI did not disclose the pricing mechanism or the volumes it expects to supply.
How the RBI dollar window actually works
Oil marketing companies are among the biggest single buyers of dollars in India. Every barrel of crude they import is paid for in the US currency, and their daily dollar demand hits the foreign exchange market like clockwork. By selling dollars to Indian Oil, HPCL and BPCL directly from its own reserves, the RBI takes one of the largest sources of dollar demand out of the open market.
Think of it as a short circuit. The spot market breathes easier because the biggest buyer has been taken aside. The cost is absorbed by the RBI’s own reserves instead.
And this was not the only move. In the same announcement, the central bank told forex dealers they will no longer be allowed to let clients rebook foreign exchange derivatives. It slashed the limit for exchange-traded currency derivative positions in the rupee from $100 million to $5 million, and ordered dealers to keep a foreign exchange risk reserve equal to 20 percent of the notional value of every rupee derivative contract, Reuters reported.
The week that forced the RBI’s hand
This did not come from nowhere. On Wednesday, the RBI’s Monetary Policy Committee raised the repo rate to 5.5%, its first hike in over three years, as inflation pushed past its comfort zone. That was the RBI tightening at home. Saturday’s move is the RBI fighting the same battle abroad.
The trigger was the currency itself. The rupee ended Friday at 96.73 to the dollar, per Reuters, barely changed on the day but sitting within touching distance of its all-time weakest level of 96.96, hit in May. In thin Saturday trading the rupee did rally about 40 paise in the offshore market, one Mumbai trader told Reuters, suggesting the announcement bought at least some relief.
Crude has not helped. The oil tanker attack in the Strait of Hormuz this week pushed crude back toward the danger zone, and India imports most of what it burns. A weak rupee plus expensive oil is the exact combination that keeps finance ministry officials awake at night.
The catch nobody mentioned
Here is the part the press release glosses over. Dollars sold directly to oil companies still leave the RBI’s reserves. This move calms the spot market, but it spends the war chest to do it. Dhiraj Nim, FX strategist at ANZ Bank in Mumbai, told Hindu BusinessLine that removing the oil companies’ dollar demand should cut volatility, but it will show up as a depletion of reserves.
And the reserves are already draining. India’s foreign exchange reserves fell $12.95 billion in a single week to $734.60 billion, according to the Economic Times. Read those two facts together and the picture sharpens: the RBI is defending the rupee with a stockpile that is itself shrinking.
It is worth remembering this is not a new playbook. The RBI opened a similar special dollar facility for oil companies in 2013, when the rupee was in free fall during the taper tantrum. It worked then, though at a cost. The question this time is whether crude prices cooperate long enough for the medicine to hold.
My prediction: if oil stays near these levels through November, this window will be tested hard, and the RBI will have to decide how much of the stockpile it is willing to burn. The rupee may have found a defender. The defence has a price tag.