With global crude oil prices showing volatile movements, the Reserve Bank of India has further liberalised oil hedging to bail out oil companies hit by high prices.To enable domestic crude oil refining companies to hedge their risk exposure, the RBI has decided to permit them to hedge their commodity price risk on domestic purchase of crude oil and sale of petroleum products on the basis of underlying contracts linked to international prices on overseas exchanges or markets. The hedging will be allowed strictly on the basis of underlying contracts.As per the prevailing trade practices, indigenously produced crude oil is purchased at international prices by the refineries. However, hedging of price risk on domestic purchases is not permitted now. Further, in order to provide greater flexibility, the RBI has decided to permit domestic crude oil refining companies to hedge their commodity price risk on crude oil imports in overseas exchanges/markets, on the basis of their past performance up to 50 per cent of the volume of actual imports during the previous year or 50 per cent of the average volume of imports during the previous three financial years, whichever is higher. “Contracts booked under this facility will have to be regularised by production of supporting import orders during the currency of hedge. An undertaking may be obtained from the companies to this effect,” the RBI said.According to the RBI, the approval of the oil company’s board should be obtained for the specific activity. The approval should include the mark-to-market policy and the counterparties permitted for OTC derivatives.
