Indian Refineries Curtailing Special FX Credit Line, Sources Indicate

India's State-Run Oil Refiners Hold Back from Special FX Credit Line

India's state-run oil refiners are making limited use of a special FX credit line offered by the country's largest bank, the State Bank of India, to ease pressure on the rupee. The move is a signal that the rupee may fall further, despite recent efforts by the Reserve Bank of India to support the currency.

The rupee, which had recovered from near 95 per U.S. dollar to around 92.50 in recent weeks, 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.

In mid-April, India offered state-run oil refiners a special FX credit line through the State Bank of India, allowing them to borrow dollars to make oil import payments. The move was aimed at curbing spot dollar buying for oil imports. However, the refiners are wary of tapping the facility since they expect the rupee to weaken further, which would raise their repayment burden.

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The use of the special FX credit line is not cost-effective if the rupee is likely to weaken, according to sources at state-run refiners. One source stated that their company is using the facility for part of its dollar requirements while meeting the rest through spot purchases. Another source said their company is resorting to short-term borrowing from the markets apart from limited use of the credit facility.

The rupee's weakening trend and persistently high oil prices are reducing the facility's appeal. 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 as Thailand 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, according to a source familiar with the central bank's thinking. However, it is not the only major factor contributing to the rupee's decline.

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The Reserve Bank of India did not immediately respond to a request for comment.