U.S. fifty dollar bills are run through a counting machine inside a currency exchange store in Mexico City, Mexico. (Photographer: Susana Gonzalez/Bloomberg)

RBI Eases Overseas Borrowing Rules For State-Run Oil Marketing Companies

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State-owned oil marketing companies will be given more leeway to borrow overseas, said the Reserve Bank of India in a notification as it sought to counter the continuing weakness in the rupee. The Indian currency closed at a record low of 73.34 against the U.S. dollar on Wednesday in reaction to higher oil prices.

As per the new rules, OMCs will be able to raise external commercial borrowings for working capital purposes from “all recognised lenders” under the automatic route.

Until now, such borrowings for working capital purposes were permitted only from direct or indirect equity holders or from a group company.

It has been decided, in consultation with the Government of India, to liberalise the said provision and permit public sector Oil Marketing Companies to raise ECBs for working capital purposes with minimum average maturity period of 3/5 years from all recognized lenders under the automatic route.  
RBI Notification

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.

Hindustan Petroleum Corporation Ltd.’s board will consider using the “window of opportunity” as it opens up a new line of credit for working capital, said its Director of Finance J Ramaswamy. “If there is proper planning, the bunching of repayments can also be acquitted,” he told BloombergQuint. “That, the board will definitely take into consideration.”

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.