Oil firms rush for forward deals in forex, crude marts

Domestic oil companies are rushing into forward contracts in the crude and forex markets to cushion themselves against rising crude prices and a depreciating rupee.

On the one hand, oil firms are entering into contracts for buying crude in the international oil futures market and, on the other, they are striking forward contracts in the forex market to make dollar payments on crude delivery.

According to officials of some public sector banks, which do business with oil companies, there has been a shift from spot payment to future contracts within a span of a few weeks. The change in the strategy started when the spot rupee touched 46.25 to a dollar in mid-September.

Dealers pointed out that most contracts in the forward dollar market was near term. The near-term premium on forward dollars are more than the relatively longer term.

While one-month and three-month dollars are available at 2.48 per cent and 2.40 per cent, six-month is at 1.92 per cent and one year 1.6 per cent (all annualised). A month back, dealers said, oil firms were seen spreading out their import payments on a daily basis by preferring to pay daily for their imports to avoid the exchange rate risk.

This strategy had paid off well at that point of time when the oil price itself was volatile coupled with a rising inflation rate.

According to a forex dealer, an informal estimate of RBI puts an incremental outflow of $675 million with $1 increase in the price of crude.

Dealers added that the strategy of oil firms combined with the RBI's heavy intervention in foreign exchange market by selling dollars to support the spot rupee rate. In the process, the forex reserves have fallen by almost $ 2.5 billion.

The strategy of RBI to sell dollars and support the rupee has paid off in two ways. It has been able to curtail the impact of excess liquidity in the system on the rising inflation rate (which again is owing to the oil prices to a large extent).

Secondly, the rupee-dollar rate being supported below 45.50 has made capital outflows lesser on account of oil payments. The inflation rate continues to be a concern owing to the turbulence in the international oil market.

Therefore, while the fact is well acknowledged, there is a limit to which RBI could support the spot rupee to make oil payments and, thus, curtail its impact on inflation, said a treasury head of a bank.