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INDIA BUSINESS WORLD - NOVEMBER 1st – NOVEMBER 15th 2008
RESERVE BANK OF INDIA ALLOWS REPO TRANSACTIONS IN OIL BONDS
FOR the first time, the Reserve Bank of India (RBI) has allowed ready forward (or repo) transactions in oil bonds — a move that could enable oil companies to raise money at a cheaper rate. Oil bonds are issued by the government to oil marketing companies as compensation towards estimated under-recoveries on account of sale of petroleum products. However, in the absence of adequate demand from banks and other financial institutions, oil companies had to sell the bonds at a lower price.
With RBI now allowing repo deals in oil bonds, there will be takers among banks and bond houses. The players in the money market can now pledge the bonds to borrow overnight fund from the RBI repo window. However, the bonds will not be treated as government securities and banks cannot hold it as part of the statutory liquidity requirement.
RBI made oil bonds worth Rs 22,000 crore eligible for repo transaction. The allocations are Rs 11,975.51 crore to Indian Oil Corporation, Rs 4,693.73 crore to Hindustan Petroleum Corporation and Rs 5,330.76 crore to Bharat Petroleum Corporation. The oil bonds would have a coupon interest rate of 8.20% and mature in 2023.
According to the CFO of an oil company, "We are not sure whether banks would be willing to buy the oil bonds unless RBI comes out with details on what price the banks will be allowed to buy them."
In yet another measure to improve liquidity, the central bank announced the buyback of two market stabilisation scheme (MSS) bonds worth Rs 10,000.
MSS bonds are securities floated under the market stabilisation scheme to imound excess liquidity. A buyback programme will create liquidity to that extent.
RBI would buy back 6.65% bonds maturing in 2009 and 5.87% bond maturing in 2010. Both bonds are worth Rs 5,000 crore each. In the first phase of redemption of MSS bonds, RBI had infused Rs 10,000 crore.
The decision on oil bonds, which have been debated in the past, came as a surprise to the market. As a temporary move RBI had even bought some of the oil bonds, where the oil companies routed the transaction through a PSU bank. Close to Rs 19,000 crore oil bonds was taken by RBI on its books. However, this has been discontinued.
Subsequently, to rescue oil companies, RBI bought oil bonds against dollars. This also eased pressure on rupee since oil companies were directly purchasing dollars from central bank. The data released by RBI shows that oil companies have sold bonds over Rs 10,000 crore between May-end and early July.
According to a bank treasurer, banks may continue to be apprehensive about buying oil bonds since there could be mark-to-market (MTM) risk. If the price of bond falls below face value, banks may have to show depreciation on the bonds and make equivalent provisions on the same. "As long as there is uncertainty on interest rates, there will be resistance due to MTM fears," he added.
In the past, there were instances when oil companies were saddled with oil bonds because there was resistance from banks to buy these bonds due to fears of MTM losses. As a result oil companies faced a cash crunch.
Banks and bond houses can now pledge the bonds to borrow overnight fund from the RBI repo window.
These oil bonds will not be treated as government securities and banks cannot hold it as part of the statutory liquidity requirement.
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