The Reserve Bank of India (RBI) on Wednesday allowed state-owned oil marketing companies (OMCs) to raise external commercial borrowings (ECBs) from lenders under the automatic route.
OMCs, including Indian Oil Corp. Ltd, Bharat Petroleum Corp. ltd and Hindustan Petroleum Corp. Ltd, may raise ECBs for working capital with a minimum average maturity of three to five years. The RBI decision comes on the back of a fast depreciating rupee and rising oil prices.
Crude prices are expected to touch $100 per barrel within the next few months, while the Indian rupee breached 73 against the US dollar for the first time on Wednesday.
The overall ceiling for such external commercial borrowings has been set at $10 billion. The individual limit of $750 million and mandatory hedging requirements have also been waived. “However, OMCs should have a board approved forex mark-to-market procedure and prudent risk management policy, for such ECBs,” said the regulator.
The liberalised overseas borrowing rules will push back the demand for dollars from oil companies, provided these firms can raise overseas loans at reasonable rates. It is, in some ways, an alternative to the option of opening a window for direct dollar sales to oil marketing companies from the RBI’s reserves.
This is a good move as it postpones the demand for dollars, said Bhaskar Panda of the treasury advisory group at HDFC Bank Ltd. However, global liquidity conditions have also tightened and rates have risen so it remains to be seen whether state-owned oil companies would be able to raise adequate funds overseas at reasonable rates, Panda said. He, however, added that oil companies would need to plan carefully since a further depreciation in the currency could hit these companies down the line.
Jayesh Mehta, treasurer at Bank of America-Merrill Lynch believes that state-owned oil companies should be able to raise external borrowings. This could help reduce some of the demand for dollars over the next few months, he said.
The RBI’s latest announcement follows measures already announced by the government and the central bank to limit the fall in the rupee, which has weakened by more than 12 percent this year. The government has announced higher import duties on 19 items and the RBI has announced measures to draw in more capital to fund the current account deficit. None of those measures have had much impact in slowing the depreciation in the currency.
The Reserve Bank of India will permit oil marketing firms to raise overseas funds with minimum average maturity period of 3 or 5 years under the automatic route, it said in a statement. It lifted the individual borrowing limit set at $750 million under the ECB framework.
The move comes in light of the rupee’s drop to a record low on Wednesday triggered by a sharp rise in global crude oil prices, prompting the central bank to quickly intervene to slow its fall.
