RBI allows domestic oil refiners to hedge risk; invest more in the offshore subsidiaries and JVs

Mumbai: Before the cabinet could decide on a revision of the prices of petrol and diesel, the Reserve Bank of India (RBI) has allowed domestic refiners to hedge their petroleum products' sale and domestic crude purchase, to the extent linked to international prices, on foreign commodity exchanges.

The hedging would be allowed on strictly on the basis of underlying contracts on foreign bourses, the central bank said in a notification. RBI's notifications also said that to allow some flexibility to oil companies, the central bank is allowing domestic crude oil refiners to hedge up to 50 per cent of the actual crude oil imports in the previous year, or 50 per cent of the average imports during the previous three financial years, whichever is higher.

It said that hedging must be done through banks, with the facilitator bank having obtained the necessary board approval from the refiner, which includes explicitly the mark-to-market policy.

The RBI has also allowed oil companies to invest higher amounts in their joint venture companies and subsidiaries abroad, with investments being capped at up to 400 per cent of their net, in excess of which the central bank's prior approval will have to be sought. 

These options were till now available only to the 'navratna' public sector companies. Moreover, the central bank and liberalised investments in overseas unincorporated entities in the oil sector, by letting all Indian companies invest in them. 

The move comes after the oil companies were asking for a further liberalisation of hedging facilities to part-insure them from the volatility that the markets have been seeing.