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Here’s a Look at India’s Measures to Stem Hit From Oil Shock

India is rushing to contain the fallout of the Iran war, as soaring oil prices hammer the rupee and drive record foreign outflows from local stocks.

From curbing gold imports and raising fuel prices to tightening currency-market rules, authorities have stepped up efforts to conserve dollars, with the rupee hitting a new low Tuesday. A 50% surge in oil prices since the start of the war means a ballooning import bill and rising inflationary pressures for the world’s third-largest oil consumer.

Here’s a look at the measures so far and what the country could do going forward to limit the damage from the Middle East conflict:

Higher fuel prices

India’s state-run refiners on Tuesday fuel prices for the second time in less than a week, extending a round of increases aimed at easing pressure from surging crude costs.

Diesel and gasoline prices were increased by over 3% last week, a modest hike compared to the surge in crude. The move reflects the government is trying to balance inflationary and fiscal pressures, and may go for staggered hikes as seen in the past.

Gold, silver tariffs

The government more than import taxes on gold and silver to about 15% from 6% to defend its currency, following a rare appeal from Prime Minister Narendra Modi to forgo purchases of the yellow metal.

The world’s second-largest bullion market also the rules for silver imports after the rupee sank to an all-time low. The import of silver bars is now “restricted” rather than “free”, meaning only shipments licensed by the Directorate General of Foreign Trade can be brought into the country.

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Rupee defense

The Reserve Bank of India has stepped in to defend the rupee, with foreign exchange reserves down about $32 billion since the start of the war. It on speculation in the currency markets, restricting banks from undertaking the full range of FX derivative deals with related parties, and a $100 million cap on onshore open positions for lenders.

India is a reduction in taxes paid by foreign investors on the nation’s bonds as authorities try to curb the rupee’s depreciation, according to people familiar with the matter. The central bank is also weighing a for state lenders to sell foreign-currency bonds, mulling a tool last used nearly three decades ago to draw capital inflows.

Edible oil imports

The world’s top edible oil buyer is considering a request by the domestic vegetable oil industry to raise import duties to help local farmers fetch better prices for their crops. Palm oil, the world’s most-widely used edible oil, has surged about 12% since the war began.

Exporter dollar conversions

The RBI could change on currency hedging for importers and ask exporters to repatriate dollars immediately upon receipt. Currently, exporters are allowed to retain their dollar earnings in Exchange Earners’ Foreign Currency accounts without immediately converting them into rupees, though balances must be converted by the end of the following month.

Liberalized Remittance Scheme

Currently, individuals in India can send foreign exchange for travel and education among other things under the so-called Liberalized Remittance Scheme. The annual limit of $250,000 may be temporarily reduced for select categories to control dollar outflows from the country.

“We expect more policy announcements to be unveiled in the coming weeks and months,” Nomura Holdings Inc. analysts wrote in a note dated May 13, citing tighter rules under LRS as one of the options.

Another route is to raise dollar funds from non-resident Indians by offering attractive rates, a strategy used in the past. In 2013, the RBI garnered $30 billion through such deposits at around 3.5%.

This option looks expensive now. US interest rates are much higher than they were back then, with the Fed’s target rate currently at 3.75%. Add in elevated global yields and hedging costs, and this option is prohibitively costly for the RBI at present.

If stress deepens, the RBI has a more technical backstop available. It could tap the US Federal Reserve’s Foreign and International Monetary Authorities repo facility by pledging part of its $190 billion in Treasury holdings.

This would allow the RBI to access dollars through overnight repo operations, which can then be rolled over for seven days, former Deputy Governor Michael Patra wrote in his recent column in Basis Point Insight.

The RBI could then supply dollars domestically via short-term swaps aligned with the FIMA tenor. This approach helps avoid interest rate risk while also reducing counterparty risk, Patra wrote.

CRR increase

The central bank could raise the cost of funds for banks temporarily by draining liquidity via a higher cash reserve ratio, according to Gaurav Kapur , chief economist at IndusInd Bank.

The RBI used this tool in 2013 — the year of taper tantrum — when the rupee came under pressure. A hike would also restore the ratio to its previous levels after it was cut by a full percentage point to 3% in June to boost liquidity into the banking system.