India to sell dollars to state oil firms in rupee boost

rupee notes
Image caption The Indian rupee has fallen by more than 20% against the US dollar this year

India's central bank says it will sell US dollars to three state-run oil firms as it looks to stem the decline in the Indian rupee.

It said the sales would help to meet the "entire daily dollar requirements" of the three firms. According to some estimates, they import about $300m (£180m) worth of oil daily.

The rupee bounced back from its record low, rising 2.5% against the US dollar.

The Indian currency is one of the worst performers in the world this year.

It has declined more than 20% against the US dollar since the start of 2013.

Global oil contracts are mostly settled in US dollars. As a result, Indian oil firms need to sell rupees to buy US dollars to pay for the imports.

The central bank's swap window is expected to take the bulk of their dollar demand away from the foreign-exchange market and help to stem the decline in the rupee.

However, some analysts said the central bank's move was unlikely to result in a sustained recovery in the currency.

"The measure is unlikely to arrest the decline in the Indian rupee with the authorities increasingly trying to find new means to stem the rout in the currency," said Mitul Kotecha, head of global markets research for Asia at Credit Agricole.

Oil price rises

The move by the central bank also comes amid volatility in the global oil price - triggered by concerns of a military strike against Syria.

Although Syria is not a major oil producer, the speculation has stoked concerns about stability of the Middle East - which is a key oil producing region.

On Wednesday, US crude oil touched its highest price since May 2011, rising to $110.17 a barrel, before falling back slightly.

Brent crude oil also hit a six-month high above $117 a barrel.

Rising oil prices are a particular concern for countries such as India - which imports nearly 80% of its oil.

The situation has become even tougher for India as its currency has declined, which means it has to pay far more for its imports.

That has added to worries over India's burgeoning current account deficit - a key area of concern in the Indian economy.

A deficit is created when the country's import bill is bigger than its earnings from exports.

A widening deficit not only puts a strain on the nation's foreign exchange reserves and but also indicates that it may need to borrow more money, putting further pressure on its budget.

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