What changed
Previously, hedging of domestic crude purchases was not permitted. Now, refiners can hedge price risk on domestic crude purchases and petroleum product sales linked to international prices. Additionally, for anticipated crude imports, they can hedge up to 50% of actual imports in the previous year or 50% of the average of the last three years, whichever is higher.
What it means for you
This liberalisation gives oil refiners more flexibility to manage volatile crude and product prices, reducing earnings risk. Banks must ensure companies have board-approved derivative policies, mark-to-market frameworks, and half-yearly OTC reporting. It expands hedging opportunities but requires stricter compliance oversight from lenders.
What you must do
- Verify that domestic oil refining companies have board-approved policies for derivatives, including mark-to-market and counterparty limits.
- Ensure companies provide half-yearly lists of OTC transactions to their board and evidence this before continuing hedging facilities.
- Confirm that hedging for domestic purchases and sales is strictly based on underlying contracts linked to international prices.
- For anticipated import hedging, obtain an undertaking from the company to regularise contracts with supporting import orders during the hedge period.
Who it affects
AD Category-I banks authorised for commodity hedging, Domestic crude oil refining and marketing companies, RBI's foreign exchange and risk management divisions
Can oil refiners now hedge domestic crude purchases?
Yes, RBI now permits hedging of price risk on domestic crude oil purchases and sales of petroleum products, provided the underlying contracts are linked to international prices on overseas exchanges.
What is the limit for hedging anticipated crude imports?
Refiners can hedge up to 50% of actual imports in the previous financial year or 50% of the average imports over the last three years, whichever is higher. Contracts must be backed by import orders during the hedge period.
What compliance must banks ensure before allowing hedging?
Banks must confirm that the company has a board-approved derivative policy, specific board sanction for OTC dealings, a clear mark-to-market policy, and half-yearly OTC transaction reporting to the board.