Despite the recent measures announced by the Reserve Bank of India-enhancing the credit limit of the three oil marketing companies (Indian Oil, BPCL and HPCL) by Rs 14,000 crore?the tight liquidity position in the financial markets continues unabated and is pushing the OMCs to the brink. The cash crunch in the money markets in India can be judged from the fact that funds are not even available for roll over of loans, which, in turn, is increasing the risk of liquidity for the OMCs.

The OMCs have also told the government that the liquidity crunch is forcing them to borrow at very high interest rates, as a result of which their interest burden during 2008-09 is expected to be Rs 5,000 crore more than that for the previous year. This is affecting their profitability further. Also, the OMCs have warned the petroleum ministry that even after accounting for oil bonds, which are to be issued shortly, their second quarter results at the end of October 2008 are expected to show heavy losses.

The grim financials of the OMCs are evident from the fact that their combined borrowings have increased from Rs 66,900 crore in March to Rs 93,500 crore till August and are close to Rs 1.1 lakh crore at present.

When contacted, IOC chairman and managing director Sarthak Behuria confirmed that the company?s interest burden would be Rs 3,000 crore more than last year?s Rs 1,400-1,500 crore. BPCL?s CMD Ashok Sinha, in a recent letter to the petroleum ministry, said, ?The corporation?s interest for the year is likely to exceed Rs 2,200 crore.? HPCL?s CMD, Arun Balakrishnan, too, has told the ministry that interest cost for the year is expected to more than double?from

Rs 782 crore in 2007-08 to about Rs 1,800 crore during the current financial year.

The three state-owned oil companies are thus eagerly waiting for the issuance of oil bonds by the government. Out of the Rs 90,000 crore oil bonds already cleared by the government during 2008-09, the finance ministry is expected to take the Parliamentary approval for issuance of oil bonds worth Rs 60,000 crore to IOC, HPCL and BPCL.

The amount includes oil bonds worth Rs 14,956 crore for the fourth quarter of 2007-08, Rs 24,408 crore for the first quarter of 2008-09 and the rest for the second and partially for the third quarter of 2008-09. The issuance of these oil bonds by the month-end are expected to help the OMCs tide over their liquidity crisis to some extent.

However, with the hardening of interest rates in the country, the losses on sale of bonds have also gone up. Therefore, the petroleum ministry has asked for simultaneous resumption of the special market operations by the RBI. Interestingly, the petroleum ministry has cautioned that the heavy demand for US dollars by the three oil marketing companies (OMCs), after issuance of oil bonds to them by the month-end, may further cause depreciation of the rupee.

?Resumption of SMO has acquired urgency in the scenario of the depreciating rupee, as the OMCs heavy demand for US dollar has the potential for causing a further depreciation of the rupee,? said the petroleum ministry in a recent communiqu? to the PMO.

The ministry has accordingly asked the finance ministry to advise RBI to immediately resume the special market operations for liquidation of oil bonds and providing equivalent foreign exchange at market exchange rates to the OMCs through designated banks.

A note of the petroleum ministry prepared for the consideration of PMO said at current crude oil prices, the under-recoveries of the OMCs for 2008-09 are estimated to be at Rs 1,65,748 crore. Of these, the upstream companies (ONGC, GAIL and OIL) will absorb a maximum of Rs 45,000 crore while the OMCs will bear a burden of Rs 20,000 crore. The balance under-recoveries which will then have to be met by way of oil bonds stand at Rs 1,00,748 crore. If the under-recovery figure goes up further, the residual portion would again have to be compensated through issuance of oil bonds.