Mumbai: In order to provide a breather to the cash-strapped oil marketing companies, the Reserve bank of India (RBI) has decided to allow trade in oil bonds via special market operations, subject to a ceiling limit of Rs1,000 crore per day.

The RBI has also opted to provide much needed foreign exchange to the oil marketing trio of Indian Oil (IOC), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL) to help them tide over the present financial crunch.

In a notification, the RBI said that it has decided to conduct open market operations in the secondary market through designated banks, in oil bonds held by public sector oil marketing companies, in their own accounts subject to an overall ceiling of Rs1,000 crore on any single day. According to the central banking authority, the move will help mitigate the adverse impact of cash-strapped oil marketing companies across financial markets such as money, forex, credit and bond markets.

However, analysts opine that these bonds are practically useless to the oil companies. They are issues by the government to help oil companies cope with their losses from the subsidies on petroleum products, and are already traded in the market, with very few takers, and often have to be sold at a discount by the oil companies.

On the other hand, sources in public sector banks say that the move will the oil marketing companies generate more cash from their oil bonds, as they can then avoid selling the paper at heavy discounts to the face value, as is the case presently.

According to RBI's notification, special market operations in oil bonds would make up just about a fraction of the total turnover in the money and foreign exchange markets, but that is likely help in reducing volatility. These special market operations would be a temporary measure, and will be subject to regular reviews. These will include outright or repo deals conducted through the designated banks.

Sources in the oil industry say that though the RBI's move is welcome, it addresses only a part of the problem, and leaves the core issue of revising the retail prices of petroleum products unaddressed. BPCL, which is the smallest of the three oil marketing companies has bought dollars worth nearly Rs3,000 crore in May alone, and due to the compounding losses from selling diesel, petrol, kerosene and LPG at subsidised prices, anre now forced to borrow even more.

BPCL's debt-equity ratio is steadily progressing from the present 1.5:1 to 2:1, eroding the company's value. That means that though the RBI has eased up the lending norms, banks will still think more than twice to lend to a company who's debt-equity ratio is this high, and moreover, are aware of the fact that their lending will go in part towards funding a subsidy.

An allied problem is that oil marketing companies receive the oil bonds with a time lag, that locks even more precious working capital. They have been negotiating with the government to receive these bonds without the lag, and would also like to sell the entire stock of bonds to unlock working liquidity, instead of the present stipulated cap of 25 per cent.

BPCL, for example, will have a stock of bonds worth nearly Rs12,000 crore, but can only sell bonds worth Rs 3,000 crore because of the government's cap on selling the bonds. The company is still awaiting bonds valued at around Rs4,000 crore, pertaining to the subsidy of the fourth quarter of 2007-08.