RBI’s Dollar Swap Facility To Oil Refiners Is A Very Dangerous Game

[The article is contributed by our regular reader – Altaf Rahman]

Every month India exports are worth 15 billion USD (rounded off for understanding) Similarly India imports are worth 25 billion USD every month (rounded off again)

One has to note two things here:

1) The bulk of the 25 billion imports include Crude and Gold.

2) The above implies the trade gap is 10 billion USD.

For point 1,  Chidambaram is addressing Gold issue by restricting Gold imports so that the trade gap comes down to a less difficult level. We can do nothing about Crude imports. They need to be imported to sustain survival.

Now lets discuss about Point 2. This is where my discussion comes into picture.

Our trade gap is 10 billion USD. Lets imagine the market place in a simple way. Some Indians selling goods to the outside world and bringing in 15 billion USD.

At the same time some Indians are importing goods from outside world and need 25 billion USD to pay for the goods.

Now lets assume RBI as a dealer. It takes 15 billion USD from exporters and pays them in rupees.

Now the same dealer has to take rupees from importers and have to give them 25 billion USD. It can manage upto 15 billion USD.

Now what about the rest of the 10 billion USD?

Unitl last quarter, some FIIs wanting to invest in India are bringing in dollars which RBI is using to pay the difference of 10 billion USD.

Since last quarter, US declared QE tapering off (what ever it means is just relevant to quote but not the subject of the issue here) the FII have their own logic and their logic says take out the dollars and go back to US.

Now in addition to the deficit of trade gap of 10 billion USD, RBI has to give dollars to these FII also. So RBI needs lots of dollars to manage the show. As it has limited reserves, it is finding it difficult to provide dollars to the needy and as a demand supply principle, dollar is getting costly and less in circulation while rupees are abundant and are unwanted and rupee is going down.
Now RBI has no where to find solution.

Also as it is the last week in office for the Governor so he wanted to save face for himself and load the problems to his successor by providing the so called "Dollar swap facility" to the Refiners.

Lets see what this "Dollar swap facility" provided to three refiners.

These three refiners import crude oil for refining and need an average of 300 million dollars per day, almost 7-8 billion Dollars. RBI has foreign currency reserves of about 250 billion dollars. It has not touched these reserves all these years.

Now under the "Dollar swap facility" these reserves are in grave danger. The arrangement is as follows :

RBI lends what ever dollar requirement of these three refiners "on loan basis" for a period of one year.

In the media no one discussed what this means. Every one thought if this demand of 7-8 billion USD is taken of from market, the other importers can manage with exporter’s dollars. 

No one in media is discussing where these 7-8 billion USD are going to come to the refiners. RBI is lending the 7-8 billion USD from its kitty to these refiners every month for one year. That means it will lend about 100 billion USD to them in one year.

It means after one year RBI reserves will come down to 150 billion USD.  The understanding is after one year, these refiners will return the dollars to RBI. It looks OK on paper. But we are overlooking basic issues here. Like :

1) Where the refiners get the dollars to pay back RBI? They are not earning dollars by export. They are merely refining.
2) If they come back to market to buy these dollars (7-8 billion per month) to repay to RBI, they will be coming to market to buy dollar requirement of next year plus to repay to RBI. So the demand will be double.

That means more demand for dollars in market and more drastic fall of rupee. I see this as a very negative game of RBI. It can not supply 7-8 billion dollars today and arranging dollar swap facility and assuming it will provide 14-16 billion tomorrow.

This kind of "master plans" fit into the present govt culture, but how a man of such stature of Subba Rao allows such things to happen, that too in his last week in office of such an illustrious carrier?

If things go on like these, the status of rupee will be far more dangerous.

Just to give an idea, this year rupee fell from 50 to 65 because of trade gap of 10 billion USD. Next year it may fall from 75 to 150 just based on this one issue of "Dollar swap facility"

I am against this move and what do you think?

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