CB to stop supplying dollars for oil bills

Reuters: The Head of the Central Bank said on Thursday it may stop supplying dollars to pay for oil import bills from May, its latest move to allow more rupee flexibility after it refrained from intervening in foreign exchange markets last month.

The Central Bank shifted its foreign exchange policy to allow the market to determine the currency’s rate on 9 February and stopped defending a certain price level by selling dollars in the market.

The moves came after it spent more than $ 2.7 billion to stave off rupee depreciation in the second half of 2011.

However, the bank said it could still intervene to meet any dollar shortages for the country’s oil bills and provide dollars for oil payments outside the market up to 9 May, to prevent the country’s fuel imports from distorting the exchange rate.

“Our view now is after three months we may not need to supply any dollars further,” Central Bank Governor Ajith Nivard Cabraal told Reuters. “Even now we hadn’t had to provide dollars for oil bills as much as we originally intended. That is because they (oil importers) were able to find dollars from the market. But that doesn’t mean that we may not purchase dollars from the market. If we see there are huge inflows coming in and there is too much of pressure to appreciate, we may decide to take some.”

Colombo’s earlier insistence on maintaining tight control over the currency has annoyed the International Monetary Fund (IMF), which has withheld the last $ 800 million installment of a $ 2.6 billion loan since September.

The Central Bank failed to stop interventions in the foreign exchange market despite repeated IMF requests.

Since the Central Bank halted interventions earlier this year, the rupee has been depreciating mainly due to seasonal importer dollar demand. It hit a record low of 131.60 on 19 March, but has recovered two per cent since then.

Cabraal said the Central Bank would continue to buy dollars to build up its reserves even after achieving the end-March IMF reserves target. “The IMF reserve target will be comfortably achieved. We are confident there will be once again a fairly good build up. But sometimes in times of global uncertainty may be useful to have more (reserves) than what you need,” he said.







Box