Mumbai: The Reserve Bank of India’s, or RBI’s, move to buy and sell oil bonds held by oil marketing firms and provide foreign exchange to these firms through banks may not have an impact on the country’s bond market, which is still driven by policy rate signals and inflation numbers, but it would arrest the slide of the rupee against the US dollar.
Bond and foreign exchange dealers feel the move will strengthen the rupee as oil firms will now approach RBI directly for their dollar needs, and this will reduce the demand for it in the open market.
The rupee rose to 42.18/19 a dollar in afternoon trade on Monday, from its Friday’s close of 42.45/46, and the 10-year bond yield dropped marginally to 8.07% from the previous close of 8.10%. The local currency last week pierced the 43 mark to a dollar to its 13-month low of 43.20 in intra-day trade before closing at 42.97 to a dollar after RBI sold dollars in the market through a clutch of state-run banks.
RBI on 30 May announced that it will conduct open-market operation of oil bonds through banks and provide foreign exchange support to oil firms to improve their liquidity. The ceiling for the secondary market trade of oil bonds is Rs1,000 crore a day.
“The bond market is still tracking the inflation numbers, but it will have an impact on the foreign exchange market. RBI normally sells dollar when the rupee weakens sharply. Instead of selling anonymously in the market, it will now sell dollars directly to oil firms,” said Harihar Krishnamurthy, head of treasury at Development Credit Bank Ltd.
Oil firms are large buyers of the greenback in the market, and if their demand is contained, the rupee will strengthen.
“Oil bonds will become more attractive but this will have very little impact on market as these bonds don’t have an SLR (statutory liquidity ratio) status,” said Aloke Prasad, assistant general manager of Securities Trading Corp. of India Ltd, a non-banking finance firm that trades in government bonds.
Indian banks are required to have 25% of their assets in government securities with SLR status.
However, A. Prasanna, vice-president, ICICI Securities Primary Dealership Ltd, felt RBI’s decision to lend dollars to oil firms might also benefit the bond market. “The supply of bonds in the market will come down if oil companies start approaching RBI directly. That is a bit positive for the market,” said Prasanna.
Given the demand for funds from the oil companies, RBI recently hiked the banks’ single borrower exposure to 25% from 15% of their capital and reserves. Banks can even lend 30% of their capital and reserves to an individual oil company if required.
The most important thing that has happened for the bond and foreign exchange markets is the easing of norms in external commercial borrowings. The government on Saturday allowed companies in the services sector to raise up to $100 million (Rs422 crore) to import capital goods.
“This will bring down the demand for credit from these firms and force banks to park funds in the bond market,” said a senior official of a public sector bank who did not wish to be named.
The yield on the benchmark 10-year bond closed at 8.09% on Monday from its previous close of 8.10%. The rupee closed at 42.40/41 a dollar even as Sensex, the benchmark index of the Bombay Stock Exchange dropped more than 2%.