RBI dollar window to shield rupee from oil import demand

An RBI dollar window will now cover the full daily dollar needs of three state oil firms, as India’s central bank moved to ease pressure on a weak rupee.

The Reserve Bank of India announced the step on Saturday, along with a set of tighter rules for the currency market. On Friday, the currency ended trading at 96.71 per dollar.

The window covers Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. It takes effect on October 12 and will stay open until further notice.

How the RBI dollar window works

Designated banks will handle the sales, with the RBI providing the dollars to the three firms. As a result, the RBI dollar window will keep their daily demand out of the spot currency market.

Oil companies rank among the largest buyers of dollars, because India imports much of its crude oil. Their demand can weigh on the rupee, especially when global oil prices rise.

According to the RBI, it took the decision after assessing “current market conditions”. By supplying dollars from its own reserves, it hopes to cut immediate demand and calm volatility.

Yet the plan carries a cost, since every dollar handed over comes out of India’s reserves. Those reserves dropped $12.95 billion in the week to October 2, leaving them at $734.60 billion after a fourth weekly decline in a row.

That left them roughly $51 billion short of the September peak of $785.70 billion.

Tighter rules on forex derivatives

Alongside the window, the RBI introduced several curbs on currency derivatives. First, banks may no longer let users rebook rupee derivative contracts that they have cancelled.

This curb extends to deliverable and non-deliverable deals alike. Still, users can roll over contracts when they mature, subject to existing rules.

Second, the RBI lowered to $5 million, from $100 million, the limit up to which firms could hedge without proof of an underlying exposure.

In addition, the tighter cap covers exchange-traded rupee derivatives, counting all recognised exchanges together. In this way, the RBI wants large positions backed by real trade needs, such as import bills or export earnings.

Third, the RBI created a new Foreign Exchange Risk Reserve for eligible contracts above $2 million. Authorised dealers will have to park cash with the central bank worth 20% of the rupee amount of every qualifying deal.

It targets hedges of current account exposures in which a user buys foreign currency with rupees. Consequently, such trades will become more costly.

Finally, banks must obtain a written promise from each user that no other bank has hedged the same exposure. This aims to stop double hedging and improve transparency.

Limits of the RBI dollar window

Taken together, the measures may curb speculative dollar buying and calm short-term moves. Even so, their success will depend on crude oil prices, foreign investment flows and global dollar trends.

For now, the RBI dollar window offers quick relief to the market. Lasting stability, though, will rest on the wider balance between dollar supply and demand, and on the broader external economy.