Hedging easier for oil companies

MONETARY POLICY 2008-09/ POLICY AND BUSINESS

The RBI has permitted domestic crude oil refining companies to hedge their commodity price risk on domestic purchase of crude oil and sale of petroleum products on the basis of underlying contracts, which are linked to international prices on overseas commodity exchanges/markets.

Refining companies can hedge upto 50 per cent of the volume of imports during the previous year or 50 per cent of the average volume of imports during the previous three financial yeas, whichever is higher.

 

The companies will have to ensure regularisation of the contracts booked under this facility by production of supporting import orders during the currency of the hedge. The proposed norms will allow Indian companies to hedge their payments without seeking the RBI's nod.

Indian oil firms purchase crude from overseas and process it in India. This, in turn, is sold to the domestic companies at the spot price (the prevailing price at that point of time).

Till now, the companies could not hedge their future payments to the domestic oil firms without getting the RBI's approval. By the time approval is obtained, the oil prices go up, say experts. Even if the payments are done in rupees, the underlying base price is in dollars and keeps fluctuating.

The RBI has also allowed Indian companies to invest overseas in energy and natural resources sectors such as oil, gas, coal and mineral ores in excess of the current limits with the prior approval of the central bank.

This will help companies like Reliance Industries and Videocon Industries, who have been eyeing oil assets abroad.