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How To Bring In The Dollars

Business World Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Will oil companies' monthly dollar purchases be put through off market? If dealers in the foreign exchange market are to be believed, the central bank will do a great favour if it indeed does so. Simply put, an off-market deal is one wherein the Reserve Bank of India (RBI) pays oil companies the dollars they need for their crude imports. It will help ease the pressure on the rupee which fell during the week to a life low of Rs 54.48 against the greenback on Friday. The idea is not new; the central bank does it often, but it does not go public with it. Forex dealers say that it would make sense if no song and dance is made about it – if made public, it would be a confirmation the rupee is under pressure, and dollar inflows will be scarce in the days ahead. And, if at a later date, the RBI were to withdraw the measure, it may give the impression that all is well. "All of us expect the authorities to go ahead and do it. It will be a big relief to the market," says Harihar Krishnamoorthy, country-treasurer at First Rand. The last time the RBI made an official announcement about such a move was in 2008 after the Lehman Brothers' financial meltdown. At that point, the central bank gave dollars to oil companies in exchange for the oil bonds issued by the Government of India. Sources say this time around, oil companies will pay the RBI the dollar equivalent in rupees. In an off-market transaction of this sort, the dollar is sold by the central bank at its reference rate – the quote for the greenback at noon. Forex dealers say that since the dollar inflow will be poor for some time to come given the fresh round of gloom due to Greece, it is high time the central bank came up with a mechanism to fire wall the rupee. "Taking oil payments off-market is sensible, but you cannot escape from the fact that the current weakness in the rupee will hold unless you get dollars to come in," says Ajai Sahai, director-general at the Federation of Indian Export Organisation. Concerns over the global economy slowdown has made investors jittery, more so after the downgrade of 16 Spainish and 26 Italian banks by Moodys'. A fortnight back, a fire wall was thrown. The central bank made it mandatory for exporters to convert 50 per cent of the $5 billion in the exchange earners' foreign currency (EEFC) account into rupees. It helped the authorities to increase the supply of dollars in the spot market and gave relief to the rupee. This was seen as a far better option than dollar sales by the RBI, which would have impacted rupee liquidity – every time a dollar is sold by the central bank, an equivalent amount is sucked out in rupees. Of late, dollar sales by the RBI has affected rupee liquidity. It has forced it to add liquidity to open-market operations – banks avail of liquidity by pledging Government of India securities (G-Secs). The central bank has bought G-Secs worth about Rs 25,000 crore since April 2012 to infuse liquidity into the system. The bond yields are expected to stay at current levels of 8.50-8.55 per cent on the 10-year benchmark G-Sec on the back of continuous weekly bond supply, tight liquidity conditions and no rate expectations for June. The government is to auction G-Secs worth Rs 15,000 crore on a weekly basis while the liquidity condition is negative with banks borrowing more than Rs 100,000 crore from the RBI daily. The liquidity is also expected to tighten in June due to first quarter advance tax payments.