Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI
The latest move by RBI on relaxing the norms on overseas borrowing for state-run Oil Marketing Companies (OMCs) is a welcome step in the medium to long term but such a step may not be able to support rupee with an immediate succour. This is because:
Firstly, the OMCs have not been raising the funds from ECB channel and have preferred replacing the ECBs by foreign currency bonds or other options. Secondly, a prudent risk management policy may call for hedging. Thirdly, if one adds the estimated hedging cost of 4.50%, the effective cost of raising ECB is likely to be 8.62%. The SBI 3 Yr MCLR currently stands at 8.70%.
We expect RBI now to announce short term steps to stabilize the rupee. For example, opening a swap window for the OMCs for buying $ at least for one month so as to dilute the impact of rupee decline due to hardening of crude prices in the short run. This will divert an estimated $ 400 million per day from the forex market that could bring immediate relief. Additionally, imports from Iran could be denominated in rupee terms, a hike in repo rate in forthcoming policy with a change in stance, a widening of the repo - reverse repo corridor and a preferential swap window for banks could be other steps in tandem.
We believe, the RBI is caught between a Scylla and Charybdis as of now, since selling $ from reserves may also imply in part a decline in currency in circulation that has fallen the most in Q2FY19 in the last 5 years. Meanwhile, the jump in US treasury rates might also accelerate if countries like China reduce their share of US treasury holdings (India has also reduced its holdings by $14 bn).