India’s central bank has told state-run oil refiners to stop buying dollars in the spot market and instead use a government-backed credit line.
That matters because oil is priced in dollars, and refiners are some of the biggest buyers of dollars in the country. When they all go into the market at once to pay for crude, it puts direct pressure on the rupee. That pressure has been building for weeks.
The Reserve Bank of India is now stepping in to manage the demand.
State refiners, including Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation, have been asked to draw dollars through a special credit facility routed via State Bank of India. Together, these companies account for about half of India’s 5.2 million barrels per day of refining capacity.
Instead of going into the open market to buy dollars on the spot—meaning immediate purchase at current exchange rates—they can either access this credit line or buy dollars at a reference rate set by the central bank—potentially adding costs to India’s oil refiners.
The goal is simple: reduce visible demand for dollars in the market.
India’s currency has been under pressure. The rupee has fallen more than 3% this year and hit a record low past 95 per dollar in March, driven by higher oil prices and foreign capital outflows. Oil imports are a major factor. India imports the bulk of its crude, and every cargo requires dollar payments.
By centralizing those flows through SBI and shifting demand off the spot market, the RBI is trying to smooth out volatility and limit sharp moves in the currency.
The measures have been in place for about two weeks. Traders say activity from oil companies in the spot market has already slowed.
The move follows additional direction from India’s government in February, which asked refiners to consider buying more crude oil cargoes from the US and Venezuela, steering clear of Russian crude.
The central bank has also sold dollars from its reserves and tightened rules around certain currency trades. The rupee has since recovered about 2%, last trading near 93.20 per dollar.
For now, the strategy is focused on managing dollar demand at the source: oil imports.
By Julianne Geiger for Oilprice.com
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