Oil import needs return to haunt weakening rupee

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RBI had provided oil companies with a special swap window to borrow dollars as part of a package of measures to defend the rupee. RBI had provided oil companies with a special swap window to borrow dollars as part of a package of measures to defend the rupee.
SummaryThree state-run oil marketing firms require an estimated $350 million a day.

Barely a month after the rupee hit a two-month high and showed signs of stabilising after its brutal fall this year, the currency is at risk from a re-emergence of heavy demand for dollars from oil importing firms.

As the rupee hit a nine-week low against the dollar on Wednesday, extending its drop over four trading sessions to 2 percent, the overriding fear in Indian markets was the return of dollar buying by oil companies, coupled with concerns the Reserve Bank of India (RBI) will soon wind down a special dollar facility for these firms.

The U.S. dollar's rally this week on fresh expectations of the Federal Reserve scaling back its stimulus have also been factors pressuring the rupee, as well as Indonesia's rupiah and other emerging markets exposed to foreign capital flows.

But the re-emergence of dollar buying by oil importers has unnerved analysts, reminding them of the fragility of the rupee and its vulnerability to a wide current account deficit.

The three state-run oil marketing firms require an estimated $350 million a day, accounting for the bulk of dollar demand in India's markets.

The RBI had provided these companies with a special dollar swap window to borrow dollars as part of a package of measures to defend the rupee as it plunged to a record low in late August.

The swap window is expected to close at the end of November as the central bank gradually reverses its drastic rupee-defence policies. Traders fear that some of the early 3-month swaps these companies had entered into with the central bank would fall due in December, requiring them to buy dollars from the market.

"Oil companies are buying forward dollars particularly in near-month tenors to repay the central bank for the dollar swap window," said a dealer with a state-run bank who declined to be named as he was not authorised to speak to the media.

"We are seeing some demand in the 3-month tenor but I wouldn't say it is too big," said a forex dealer with another state-run bank.

The rupee weakened to 63.90 per dollar on Wednesday, before recovering some ground on suspected central bank intervention.

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