RBI steps up rupee support, opens dollar window for oil companies

The Reserve Bank of India (RBI) has implemented additional measures to bolster the Indian rupee, which has been experiencing a decline nearing its lowest point ever. In response to the currency's precarious position, the RBI has decided to open a special window to cater to the daily dollar needs of three government oil-marketing companies.

This move aims to alleviate pressure on the spot market, a tactic regularly employed during currency strain situations. Under this arrangement, the RBI will provide dollars directly to the oil companies from its foreign exchange reserves. The affected entities - Indian Oil, Hindustan Petroleum, and Bharat Petroleum - are set to access dollars from Monday onwards.

Forex dealers have been instructed not to permit users to rebook foreign exchange derivatives. To bolster currency controls, the RBI has also slashed the limit for positions in exchange-traded currency derivatives involving the rupee to $5 million, down from the previous $100 million. Additionally, forex dealers are required to maintain a "foreign exchange risk reserve" equivalent to 20 percent of the notional amount for each derivative contract involving the rupee.

Despite the RBI raising interest rates, the currency's weakness has continued. On Friday, the rupee closed at 96.73 per dollar, a figure that remained largely unchanged from its previous day's close, hovering near its all-time low of 96.96 set in May. However, the rupee managed to rally on the non-deliverable forward market on Saturday, with the one-month dollar/rupee contract falling by approximately 40 paise in minimal trading volume, according to a trader.

Addressing the oil companies' dollar requirements eliminates a significant demand source from the foreign exchange market, which should help mitigate volatility. However, this measure may lead to a depletion of reserves, noted Dhiraj Nim, an FX strategist at ANZ Bank in Mumbai.