an old post for revision answered by @jumman014 and asked by @dashing.sujay
Q ) How allowing oil companies to directly buy dollar from RBI helped ?
Ans )
Actually the manin reason for falling of rupee is india's current a/c deficit. since we import oil from international market and oil is denominated in dollar (i.e we can buy oil only in dollar) and US dollar-rate depends on supply and demand .for example the companies that sell oil accept money in dollar when these companies come to the market (forex market) to sell their oil but indian govt pays in ruppee then the indian govt goes to forex market and suppose that current rate of US dollar is 1$=50 rupees and indian govt wants to buy $1b worth of oil i.e 5000 crore rupees of oil then indian govt. will go to forex market and will say in the forex market that we want to buy dollars worth $1b and thsese dollars that indian govt want to buy is provided in market by foreigner and suppose there is not enough dollar in the market then the will say we dont have enough dollar to sell then indina govt. says i m willing to pay $1=51 i.e the foreigner are now getting 1 rupee more then more foreigner will like to sell their dollar(bec. of premium they r getting) and indian govt. is buying dollar on the behalf of these oil companies so rupee depreciated from 50 to 51(bec. of supply and demand forces) and suppose these companies did not need to buy these dollars then the demand of ruppee would have increased (bec. no one is in market to buy these dollars) in that case the rupee would have appreaciated i.e the guy who wants to buy dollar would have said i would only pay $1=48
Q) But a question arises in my mind- As the RBI has urged oil companies to buy dollar from them, so won't this decrease country's forex reserves drastically ? Assuming that RBI will provide dollars to oil companies from country's forex reserves itself as there's no alternative prima facie option.
Ans )
yes by providing dollar directly to oil companies the forex reserves of india will come down .but india has forex reserve worth $300b and oil companies will only need $30-40b dollar. and remember one thing rbi can accumulate these dollars at any timeQ) Yes, but accumulating these dollars will again depend upon exports, in which India sucks. Am I right ?
Ans )
no suppose a foreign company wants to buy an indian company worth $5b then this foreign company will come to forex market to change these $5b worth of dollar in to rupee if this foreign company directly sell dollars into the market then there will be no one to absorb this wooping $5b worth of dollar and suddenly the rupee will appreciate so then rbi will provide $5b worth of indian rupee so they have accumulated $5b worth of dollars