RBI to let firms hedge oil purchases

The Reserve Bank of India is planning to allow domestic companies to hedge their oil purchases in a bid to lower the impact of volatility in oil prices.

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).

The companies cannot 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. Even if the payments are done in rupees, the underlying base price is in dollars and keeps fluctuating.

The proposed norms will allow Indian companies to hedge their payments without seeking the RBI's nod.

To begin with, oil companies will be able to hedge 50 per cent of their receivables based on the previous years' turnover and book forward contracts upto one year maturity.

Similarly, the oil marketing companies are not allowed to hedge their refining margins, which are maintained in dollars, without the RBI's prior permission. The refinery margin is the profit accruing from a barrel of crude oil in terms of the value of refined products such as petrol, diesel and heating oil.

The RBI will enlist the services of banks with proper risk management procedures to help the oil companies book forward contracts without its prior approval.