Three sources familiar with the matter revealed that the Reserve Bank of India (RBI) has instructed state-owned oil refining companies to limit their U.S. dollar purchases in the spot market. Instead, these firms are to utilize a dedicated credit line provided by the State Bank of India (SBI) to meet their foreign exchange requirements. This measure is intended to alleviate pressure on the Indian rupee, which has been under sustained strain due to surging oil prices triggered by the Iran conflict. This marks the first time the central bank has reactivated this "crisis-mode" instrument since the outbreak of the Russia-Ukraine war.
Soaring oil prices have severely impacted the rupee. Since the escalation of conflict in the Middle East in late February, international crude prices have experienced significant volatility. As the world's third-largest oil importer, with an import dependency of approximately 88%, India has been particularly affected.
The Indian rupee has experienced a sharp decline, becoming the worst-performing major Asian currency this year with a depreciation of over 3%. In late March, it hit a record low of 95 rupees per U.S. dollar.
State-run refiners have become a significant source of dollar demand. Approximately half of India's refining capacity is controlled by three state-owned enterprises: Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL). These companies are the largest buyers of U.S. dollars in the spot foreign exchange market, continuously purchasing dollars to settle costly crude oil import bills, thereby exacerbating downward pressure on the rupee.
To break this cycle of depreciation, the RBI has implemented measures characteristic of a crisis response, which have been in effect for approximately two weeks.
The central bank has "strongly advised" these three state-owned refiners to restrict or, under certain circumstances, avoid making large direct dollar purchases in the spot market.
Simultaneously, the RBI has revived a special financing mechanism backed by foreign exchange reserves. The companies have been directed to fulfill their dollar needs through a dedicated rupee credit facility at SBI, with the central bank subsequently providing dollar support to SBI.
The direct intervention targets a major source of dollar demand. State-owned refiners' daily foreign exchange purchases in the spot market can reach $250 million to $300 million. Forcing their exit from the spot market directly removes a major buyer, physically easing selling pressure on the rupee.
The move also serves as a strong signal. It demonstrates that the RBI is deploying tools from its "lender of last resort" level toolkit to stabilize the domestic currency, sending a clear warning to speculators about the authorities' firm intervention stance.
Beyond restarting this special window for oil payments, the central bank had previously prohibited banks from offering rupee non-deliverable forward (NDF) transactions to companies and restricted banks' proprietary forex trading positions, indicating a comprehensive and determined intervention strategy.
This development comes as global oil prices have retreated somewhat amid expectations of a de-escalation in geopolitical tensions. As of Thursday, Brent crude was trading below $95 per barrel, and the rupee had rebounded approximately 2% from its record low, trading around 93.2 against the dollar.
For investors, while the RBI's assertive stance has provided short-term market stability, the future trajectory remains heavily dependent on the situation in the Middle East. As long as crude oil prices remain elevated, pressure on India's trade deficit will be difficult to alleviate fundamentally, meaning the rupee's medium to long-term outlook will continue to be dictated by the oil market.