FOCUS:RBI to buy, borrow oil bond to ease cos' cash crunch

[K.Karthik Raja]

FOCUS:RBI to buy, borrow oil bond to ease cos' cash crunch
Friday, May 30
.
By Suvashree Ghosh
MUMBAI - In an extraordinary move to help state-owned oil refiners
deal
with the "unprecedented" rise in crude oil prices, the Reserve Bank of
India
said it will borrow or buy, for the first time, oil bonds from these
companies to provide cash and equivalent foreign exchange for purchase
of
crude oil.
A banking industry official said the cash provided by the central
bank
must be used mainly for purchase of crude oil.
The central bank said it will be conducting special open market
operations for a short-term and on an ad hoc basis to indirectly
provide up
to 10 bln rupees in a day to oil companies.
The RBI said it might either do repos in oil bonds or buy these
papers on
an outright basis from these companies.
The oil companies needing cash from the central bank must come
through a
designated bank, the central bank said.
The oil companies must transact with a designated bank, which
would, in
turn, deal with the RBI.
The central bank also said it will provide foreign exchange
equivalent of
the cash generated through the oil bond repo or purchase to the
refiners.
The foreign exchange sold will also be through a designated bank.
"The OMO facility will reduce the pressure on currency as instead
of
going to market, we can go to banks," said S.V. Narasimhan, director-
finance,
Indian Oil Corp Ltd.
"This will make oil bonds more liquid," Narasimhan said.
.
EXTRAORDINARY SITUATION
The RBI said oil companies are among the key participants in the
money,
foreign exchange, credit, and bond markets.
"Liquidity and other related issues currently faced by these
entities
arising from the unprecedented escalation in international crude
prices have
systemic implications for the smooth functioning of financial markets
and
overall financial stability," the RBI said.
The special market operation although involves small amounts of
cash in
relation to the size of the market, these steps will help contain
volatility.
These market operations of the RBI would improve the access of oil
companies to domestic liquidity and alleviate the "lumpy demand" in
the
foreign exchange market in the current "extraordinary situation."
The central bank's move is an exceptional dispensation because it
mostly
conducts open market operations through government securities.
It is for the first time that the central bank will be taking any
exposure to the oil bonds, which don't qualify for statutory liquidity
ratio.
The central bank's move made some analysts wonder why the central
bank
doesn't allow oil bonds to qualify for SLR status.
The oil ministry has been demanding SLR tag for the oil bonds so
that
acceptability of these papers increases with banks. But, the central
bank,
analysts say, has been resisting the demand.
.
CASH CRUNCH
The RBI's steps today are the second in two days to help oil
refiners.
Thursday, the central bank increased these companies' bank credit
exposure limit to 25% of their capital funds from existing 15%.
The RBI's moves come as the cash-strapped oil marketing companies
were
finding it difficult to raise working capital and were about to breach
their
credit limits on surging crude oil prices amid frozen domestic fuel
retail
rates.
In fact, Indian Oil Corp, the country's biggest state-owned
refiner, had
warned that it might run out of cash by end September.
Revenue losses of oil companies have been mounting following the
sharp
spurt in crude oil prices.
Cumulative revenue losses of state-run oil marketers are estimated
to rise
to about 2 trln rupees in the current financial year to March,
compared with
773 bln rupees in 2007-08. End
.