Indian refiners limit use of special FX credit line, sources say, spelling more rupee strain

MUMBAI: India’s state-run oil refiners are making limited use of a special FX credit line offered by the country’s largest bank that aims to ease pressure on the rupee, three sources familiar with the matter said, signalling worries that the rupee will fall further.

The Indian rupee, which had recovered from near 95 per U.S. dollar to around 92.50 in recent weeks after the Reserve Bank of India took several steps to support the currency, is back under pressure, drifting near to its all-time low of 95.21.

The currency has been weighed down by oil-related dollar buying in recent sessions, FX traders say. Crude oil and petroleum products are India’s largest import items, adding $12 billion–$13 billion per month to the country’s import bill over the past three months.

India in mid-April offered state-run oil refiners a special FX credit line through State Bank of India, allowing them to borrow dollars to make oil import payments, Reuters reported. The move was aimed at curbing spot dollar buying for oil imports.

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The refiners, however, are wary of tapping the facility since they expect the rupee to weaken further, which would raise their repayment burden, two sources at state-run refiners said.

Using the special FX credit line is not cost-effective if the rupee is likely to weaken, one of the sources said, adding that his company is using the facility for part of its dollar requirements while meeting the rest through spot purchases.

The second source said his company is resorting to short-term borrowing from the markets apart from limited use of the credit facility. This source said the rupee’s weakening trend and persistently high oil prices are reducing the facility’s appeal.

The sources spoke on condition of anonymity since they were not authorised to comment publicly.

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Oil woes

The rupee has fallen about 2% over the past eight sessions, broadly matching the pace of currency declines in other oil-importing Asian peers such asThailand and the Philippines.

Brent crude, which had slid to around $86 a barrel in mid-April on optimism that the U.S.–Iran conflict would be resolved, has since climbed back to about $112.9.

Dollar purchases by oil refiners in the spot market are among the sources of pressure on the rupee, said the third source, who is familiar with the central bank’s thinking. It is, however, not the only major factor, this source said, without elaborating.

The RBI did not immediately respond to a request for comment.