The Hindu Business Line : RBI to oil cos’ rescue; begins bond purchases

Does its part
Purchases were made as part of apex bank’s special market operations.
Intervention sees return of the liquidity overhang, despite FII outflows.
Advances to the refineries are likely to be made in foreign currency itself.

C. Shivkumar

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Bangalore, June 4

The Reserve Bank of India has begun its interventions in the financial markets for meeting the funding requirements of oil companies.

Traders said that as part of the interventions, RBI has begun making purchases of oil bonds, pulling the yields on oil bonds down by 30 basis points, traders said.

The yield on the 8.01 per cent 2023 oil bond dropped to 8.90 per cent, down from about 9.2 per cent last week.

The purchases have also resulted in shrinking the spreads between oil bonds and sovereign borrowings to about 55 basis points. Last week, the spreads ranged between 80 and 100 basis points.

Traders said that that purchases were made as part of RBI’s special market operations announced late last week.

Under the operations, RBI has the option of either resorting to outright purchases of oil bonds or repurchase operations.

Outright purchases likely

The programme for special market operations is for refinery funding. But traders said that initially only outright purchases were expected.

The drop in oil bond yields implied a reduction in the cost of working capital for the public sector refineries, bankers said.

Oil companies had complained that their cost of working funds had escalated in view of the high discounting rates applied by the banks and insurance companies on the oil bonds.

This had resulted in some of refineries incurring losses on sale of the bonds, translating into higher costs.

RBI’s special market operations resulted in a return of the liquidity overhang.

The liquidity overhang was evident from Wednesday’s liquidity adjustment facility auctions. At the LAF auctions, there were 22 bids at the RBI’s reverse repurchase window for Rs 29,095 crore.

This was despite the arrival of the advance tax payments season.

Moreover, outflows from foreign institutional investors failed to reflect in the LAF auctions.

Since the beginning of this week, FIIs’ net divestments amounted to $266 million. Normally an outflow of this scale should have translated into a tightening of liquidity, implying recourse to the repurchase window, for liquidity support.

Rupee firm

The outflows notwithstanding, the rupee remained firm against the dollar at Rs 42.63.

The rupee has appreciated by about 1.2 per cent since May 22, when it hit a bottom of Rs 43.15 against the dollar. Bankers said that the firm trend of the rupee against the dollar was largely due to RBI’s release of foreign currency to the oil companies for meeting their import payment obligations.

In making such advances to the refinery sector, bankers explained, RBI’s earnings on foreign currency reserves went up.

The current yield (the interest flow at current price of the security) for instance on the 8.01per cent 2023 was about 8.7 per cent.

For accounting purposes, bankers said, RBI’s purchase of the bonds was expected to be treated as an advance to the government.

This was because the bonds were sovereign-guaranteed. Advances to the refineries were expected to be made in foreign currency itself. This accounting mitigated the possibility of reserve money build-up in the banking system.

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