RBI opens dollar window for oil companies, tightens forex rules as rupee weakens

• RBI will meet the entire daily dollar requirements of Indian Oil, HPCL and BPCL through a special window from 12 October.

• Tighter currency-derivative rules include restrictions on rebooking cancelled contracts and a lower threshold for transactions without establishing underlying exposure.

• The measures seek to ease pressure on the rupee by redirecting oil companies’ dollar demand and strengthening discipline in the foreign exchange market.

The Reserve Bank of India on Saturday announced a special facility to meet the entire daily dollar requirements of three state-run oil marketing companies, alongside tighter foreign exchange trading rules, as the rupee faces sustained pressure.

The window will cover Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. RBI will sell US dollars to the companies through designated banks from Monday, 12 October, with the facility remaining available until further notice.

The announcement follows the rupee’s close at 96.71 against the dollar on Friday, amid persistent geopolitical and global economic uncertainty.

Oil companies need dollars to pay for crude imports, making them a significant source of demand for the US currency. Providing a separate supply channel is intended to shift that demand away from the regular spot market, where currencies are bought and sold for immediate settlement. This could ease pressure on the rupee and reduce volatility.

For the companies, the window provides a dedicated route to obtain foreign currency for their daily requirements. Its wider significance lies in managing how that demand reaches the market: it does not remove the underlying import bill or guarantee a reversal in the rupee’s decline.

The central bank has used a comparable intervention before. In August 2013, it opened a window for the same three oil companies to meet their daily dollar requirements through fixed-tenor dollar–rupee swaps. The latest announcement specifies dollar sales through designated banks.

Alongside the oil-company facility, RBI announced restrictions on rebooking cancelled foreign exchange derivative contracts involving the rupee, whether deliverable or non-deliverable. Authorised dealers cannot permit users to rebook contracts cancelled with any authorised dealer after the directions were issued. Contracts may still be rolled over at maturity, subject to existing regulations.

Currency derivatives allow businesses to manage the risk of exchange-rate movements affecting future payments or receipts. The rebooking restriction limits the flexibility to cancel a hedge and subsequently recreate it, while preserving the ability to extend a contract when it matures.

RBI also cut the threshold for hedging contracted exposures without establishing the existence of the underlying exposure from $100 million to $5 million, calculated across all authorised dealers.

The corresponding threshold for rupee-linked exchange-traded currency derivatives has also been reduced to $5 million across all recognised stock exchanges taken together.

In practical terms, businesses taking larger positions will have to establish the foreign currency obligation or receipt being hedged. The revised threshold is a documentation requirement rather than an overall $5 million ceiling on hedging.

A further measure introduces a Foreign Exchange Risk Reserve, or FERR. For eligible rupee-linked derivative contracts with a notional value exceeding $2 million, authorised dealers must maintain cash with RBI equal to 20 per cent of the transaction’s rupee-equivalent notional amount.

The requirement applies to contracts hedging current account exposures in which the user purchases foreign currency against the rupee, including qualifying import-payment hedges.

Because the reserve ties up dealers’ cash, it could increase the cost of providing these hedges and potentially affect pricing for customers. The obligation rests with authorised dealers; it is not described as a direct 20 per cent levy on importers.

RBI said the regulatory changes were intended to strengthen market discipline, improve risk management and maintain an orderly and transparent foreign exchange market.

Taken together, the measures address both immediate dollar demand and the conditions under which currency hedges are booked. They could help contain market pressure, although the rupee’s direction will continue to depend on factors such as oil prices, capital flows and global financial conditions.

With IANS inputs