The Reserve Bank of India (RBI) is most likely to buy back dollars from oil importers by end of three-to-six months as part of its forex swap arrangement through which it will directly supply dollars to them.
On Wednesday, RBI said it would provide dollars to oil importers through a special forex-swap window wherein oil companies will buy dollars from the central bank and, simulatneously, agree to sell dollars back to RBI at a future date.
The move brought significant relief to the rupee, which fell 3.85% on Wednesday — worst fall in 20 years — closing at a record low of 68.82/$.
On Thursday, the currency recouped most of the previous day's losses, strengthening 3.19% to end at 66.60/$. RBI was also seen selling dollars through public sector banks in the second half of trade to help support the rupee.
“We don't know what RBI has in mind. Ideally speaking, the period should be such that there is visibility of the market coming under control. My guess is anywhere between three and six months,” said Neeraj Gambhir, the managing director and head fixed income at Nomura Securities.
“The swap can be rolled over if the oil company cannot meet the delivery of dollars,” said KN Reghunathan, the head of treasury at Union Bank of India.
RBI's swap arrangement takes away the immediate demand for dollars from oil importers from the foreign exchange market and, thus, eases pressure on the rupee. Market participants estimate that oil importers buy $300-500 million every day from the market.
“This demand will now shift to RBI, so there is some ease in the market. But this is not enough for a sustained appreciation of the rupee,” said a dealer with a public sector bank.
Such special measures to accommodate oil importers' dollar demand is not new. In 2008 and 2009, RBI had supplied dollars to oil companies, but through the purchase of illiquid oil bonds. However, oil companies no longer hold large stock of such oil bonds this time.
Meantime, the swap arrangement is likely to be neutral for the country's forex reserves which stood at $278.8 billion as on August