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Capital Mind Gets it Right: RBI asks Government To Hedge Crude Exposure


A few days back, I appeared on ET Now in a show hosted by Ayesha Faridi and Niraj Shah, where I spoke about Oil Hedges:

And then I spoke of how India should hedge some of its Crude Oil exposure. At $80 or below, Brent Crude may be low enough for us to set up longer term hedges, if available. This should be the realm of oil refiners, but most of them do not hedge, and they are government owned etc.  In a purely competitive market, they should have been hedging and reducing the cost of fuels if the hedge worked and so on, but this is not a proper market. In fact, they end up buying dollars directly from the RBI whenever RBI feels that their buying will distort the actual market.

This needs a broader approach because India imports a lot of crude. Just oil imports are more than 30% of India’s overall imports (last year: $160 billion out of the total imports of $480 bn). That means it should be of interest to reduce the overall impact of oil imports. However, the market may not really allow for long term hedges (what if the 2 year or 3 year futures are only available for a much higher price?), which means the question is moot.

It turns out someone at the RBI and the government are thinking exactly the same thing!

The government is actively considering a Reserve Bank of India’s (RBI) proposal to hedge crude oil import risks at a time when international crude prices have slumped close to the lowest in nearly four years, which could significantly reduce country’s over $155 billion petroleum import bill.

Indeed, as oil falls – and some of it is due to supply increases and shale oil in the US – India’s import bill is already down. It would be wise for us to consider setting up long term hedges, for sure. Longer term hedges still cost a lot – the December 2017 Brent Contract on futures runs at 89.35, and the 90 call options are still too expensive. (We could write put options too. Won’t get into details, but a combination of puts and calls as strategies can be used) 

While we’re surprised to see the RBI saying this, and it’s quite likely they’ve been saying it for a while, but it seems like quite an interesting coincidence. I would normally prefer to be modest, but as I’ve recently discovered, it’s he who shouts the loudest that gets all the attention.

Therefore, in whatever way one can scream from the rooftops of the Internet:

We Nailed It.

We’d love it if the government (and RBI) implement some of Capital Mind’s other proposals – to free the rupee, to allow foreign investors to buy a lot more debt (short and long term) and to please allow Indian private companies to invest without needing to set up an NBFC. Having said that, it’s incredibly awesome to chalk up another thumbs up for Capital Mind.

We’re not holding our breath, but if by the small chance that someone from RBI or the appropriate arm of the government is reading this, Thank You.


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