India Takes Steps to Mitigate Impact of Oil Price Volatility

India Seeks to Contain Fallout of Iran War Amid Soaring Oil Prices

India is racing to contain the economic fallout of the Iran war, as surging oil prices hammer the rupee and drive record foreign outflows from local stocks. The rupee has hit a new low, with authorities stepping up efforts to conserve dollars by curbing gold imports, raising fuel prices, and tightening currency-market rules.

The country's state-run refiners have raised fuel prices for the second time in less than a week, extending a round of increases aimed at easing pressure from surging crude costs. Diesel and gasoline prices were increased by over 3% last week, a modest hike compared to the surge in crude. This move reflects the government's efforts to balance inflationary and fiscal pressures, and may go for staggered hikes as seen in the past.

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The government has also more than doubled import taxes on gold and silver to about 15% from 6% to defend its currency, following a rare appeal from Prime Minister Narendra Modi to forgo purchases of the yellow metal. The world's second-largest bullion market has tightened the rules for silver imports after the rupee sank to an all-time low. The import of silver bars is now "restricted" rather than "free", meaning only shipments licensed by the Directorate General of Foreign Trade can be brought into the country.

The Reserve Bank of India has stepped in to defend the rupee, with foreign exchange reserves down about $32 billion since the start of the war. The central bank has clamped down on speculation in the currency markets, restricting banks from undertaking the full range of FX derivative deals with related parties, and a $100 million cap on onshore open positions for lenders.

India is considering a reduction in taxes paid by foreign investors on the nation's bonds as authorities try to curb the rupee's depreciation, according to people familiar with the matter. The central bank is also weighing a plan for state lenders to sell foreign-currency bonds, mulling a tool last used nearly three decades ago to draw capital inflows.

The world's top edible oil buyer is considering a request by the domestic vegetable oil industry to raise import duties to help local farmers fetch better prices for their crops. Palm oil, the world's most-widely used edible oil, has surged about 12% since the war began.

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The RBI could change rules on currency hedging for importers and ask exporters to repatriate dollars immediately upon receipt. Currently, exporters are allowed to retain their dollar earnings in Exchange Earners' Foreign Currency accounts without immediately converting them into rupees, though balances must be converted by the end of the following month.

The central bank could also tap the US Federal Reserve's Foreign and International Monetary Authorities repo facility by pledging part of its $190 billion in Treasury holdings. This would allow the RBI to access dollars through overnight repo operations, which can then be rolled over for seven days. The RBI could then supply dollars domestically via short-term swaps aligned with the FIMA tenor.

The RBI could raise the cost of funds for banks temporarily by draining liquidity via a higher cash reserve ratio, according to Gaurav Kapur, chief economist at IndusInd Bank. The RBI used this tool in 2013 when the rupee came under pressure. A hike would also restore the ratio to its previous levels after it was cut by a full percentage point to 3% in June to boost liquidity into the banking system.