RBI has asked oil companies to buy half their dollar demand from one public sector bank of their choice, says Moneycontrol.
RBI feels that oil firms seeking a single quote for their dollar requirement, instead of present practice of floating enquiring with several pubilc and private sector banks, would help check volatility and arrest the free-fall of the rupee.
This is very immature, and knee jerk. I did not expect this of the RBI.
The dollar buying process – usually towards the end of a month – means the oil marketing companies buy dollars in a large quantity (remember we import about $10 billion worth of oil per month). They currently approach all banks and dealers to give them a quote. The market, knowing that the oil companies have to buy, will then spike up the prices appropriately. This is called front running, which is illegal in an exchange traded market, but is completely legal in the forex market, apparently.
But what will this order do?
- Oilco chooses PublicBank to place order for half their requirement.
- PublicBank has to get dollars from market, places large orders with other players.
- Everyone, including PublicBank, knows that OilCo is the sucker – since this order of this size is only by OilCo.
- They front-run the bejeezus out of the business, increasing prices randomly.
The only saviour might be if RBI sells dollars to the same bank, thus limiting the impact on the market.
But this is not the right way. We have to realize this is both a market problem and a structural problem.
First, to stem short term volatility, and assuming Mr. OilCo is paying cash for the dollars, RBI should directly sell dollars to the oil companies. This is exactly the same as: a) OilCo buys dollars from bank, 2) Bank gets dollars from RBI. There are problems with this approach over the longer term, but this should be a one-off measure done only for one month.
Second, the RBI should introduce a screen-traded anonymous system for dollar spot trading. (Only futures are exchange traded). This requires a big change in rules but if we try we can do this really fast; have NSE and BSE create a spot market and use the FX-Clear or other clearing mechanism for settlement. Then, ensure oil companies can buy directly from the market. Then even other participants like retail traders can purchase dollars. This will require large changes like removing capital controls on the rupee, but hey, I think those need to go anyhow.
Third, find a way to get the oil companies to stop behaving like suckers. If you know you have to buy $10 billion a month, why would you not do a constant daily order for dollars rather than once-a-month? Who is the dolt that decided it would be perfectly fine to flood the forex market with an order that is nearly half the size of the traded market? In any other market, this kind of entity would have lost his shirt by now. The problem is that this shirt is your shirt and mine : our taxes are paying for their inefficiency.
And do you know why this move is bizarre?
Private sector Reliance Industries and Essar Oil, who between them import over 40% of crude oil shipped to India annually, will continue to buy dollars as per their company policies.
Essentially, someone else (Reliance and Essar) have figured out a better way to do things using the market. And the RBI has no authority to restrict their buying. So they choose to tell the government-owned public sector cos instead. The only rationale is that oil companies are government owned, and RBI is a public entity, so they are somehow joined at the hip. This is wrong. The government shouldn’t control the RBI, and the RBI shouldn’t control the government. We have seen sorry situations when that rule has been violated.
The RBI is, in this case, a regulator and nothing else. It should have no greater jurisdiction on a govt. owned entity than it does on a private one.
We need to stop behaving like we have gone back to the 80s. Such rules harm the market, and times like this call for radical measures, not those that are tiny and retrograde.
