Tuesday, November 27, 2012

Divinities we could do without

RBI's moves with respect to bonds for oil companies are only a temporary solution to the problem

To err is human, to persist in error is divine. When the government should be bringing in a dose of realism to oil prices vis-à-vis international trends and moving towards mass transportation, it chooses to continue to perpetrate the lopsided trend of protecting both consumers and oil companies through the self destructive policy of issuing bonds. What a divine state of affairs indeed! So divine, that even our apex bank can't keep out of it now! In an unprecedented move, the Reserve Bank of India (RBI) had opened a window to buy oil bonds in order to compensate for the cash requirement of the cash-starved, loss making Indian oil companies. Oil companies could sell the oil bonds issued to them and buy foreign exchange from the RBI, which was much lower than the existing market price of the dollar. The government had promised to issue bonds worth Rs.245 billion by June 2008 to help the companies who needed around $300 million daily to fulfill their daily requirement of oil. In fact the RBI also bought bonds from IOCL, BPCL and HPCL and gave them cash of $4.5 billion.

But now, the window has been closed and the oil companies are forced to buy foreign exchange (mainly dollars) from the open market. By squeezing the flow of dollars in the market, they are creating a situation where the demand for dollars is continuously rising and the value of rupee is falling.

Such a situation is particularly critical for the Indian capital market since it is already facing capital outflows and a falling rupee. In the first place, the issuance of oil bonds is nothing more than a stop gap solution. For companies, which are making losses to the tune of Rs.6.5 billion on a daily basis, such bonds were nothing more than a false reprieve.

Source : IIPM Editorial, 2012.

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