The Reserve Bank of India on Friday opened a special window for cash-strapped state-owned oil firms to buy foreign exchange at market rates to provide them with more liquidity and manage exchange rates at the same time.

As part of a two-pronged strategy to minimise the "potential adverse consequences for financial markets" due to the escalation in global crude prices, RBI also decided to conduct open market operations for oil bonds in the secondary market.

The move will help the three public sector oil marketing companies -- IndianOil, Hindustan Petroleum and Bharat Petroleum -- generate more cash from their oil bonds since they will be able to avoid selling the paper at heavy discount to the face value, said a Bank of Baroda [Get Quote] executive.

The OMO, which will include outright or repo deals, will be conducted through designated banks and will be subjected to an overall ceiling of Rs 1,000 crore a day.

On Thursday, RBI had relaxed the single-borrower limit for banks to enable them to lend more to the three oil firms. Last week, the central bank had also made the valuation norms for oil bonds more attractive to help the companies that have been unable to raise prices despite crude prices touching $135.

"Public sector oil companies are among the important participants in the money, foreign exchange, credit and bond markets. Consequently, liquidity and other related issues currently faced by these entities arising from the unprecedented escalation in international crude prices have systemic implications for the smooth functioning of financial markets and for overall financial stability," RBI said in a late evening statement.

Purchases by the oil marketing companies of increasingly expensive crude oil saw the rupee depreciate 4 per cent against the dollar in May and is trading at a 13-month low.

"These measures are ad hoc, temporary in nature and will be reviewed on a continuous basis," RBI added.

RBI said it will provide equivalent foreign exchange through designated banks at market exchange rates to the oil companies. "This arrangement will reduce the volatility in the foreign exchange market," said a senior State Bank of India [Get Quote] executive.

Bharat Petroleum Director (Finance) SK Joshi said that the steps initiated by RBI, though welcome, addressed only a part of the problem. "We also need to increase prices," he said.

BPCL [Get Quote], the smallest among the three oil marketing PSUs, has bought dollars worth nearly Rs 3,000 crore in May. Due to the under-recoveries, companies have been forced to borrow more. In BPCL's case, the debt-equity ratio is now at 1.5:1 and moving towards 2:1.

"RBI has eased the lending norms but banks will be reluctant to lend to a company with a high debt-equity ratio, especially when they know that the lending is also going to meet a part of the subsidy," Joshi said.

He said the oil companies were also asking the government to get the oil bonds without a lag and had sought permission to sell the entire stock of bonds to raise liquidity instead of the present cap of 25 per cent.

For instance, BPCL will have a stock of bonds worth nearly Rs 12,000 crore but it can only sell bonds worth Rs 3,000 crore to raise liquidity. It is awaiting bonds worth around Rs 4,000 crore for the subsidy for the fourth quarter of 2007-08.