The solution…………………………………..

To be honest even I don’t know what the solution to the problem I posted is.  As some people have said that I should only go on and give the solution. So here  I am doing some loud thinking which might result in something gibberish, but I dint name the blog Financial Gibberish for nothing (I have the liberty).

The first and the most obvious point is to build more reserve capacity which I guess has already started as the oil ministry has proposed to built a capacity of 1.33 million metric tons at Visakhapatnam on the east coast. The nation’s storage capacity will rise to 5 million tons when two more terminals are built at Mangalore on the west coast by 2012. That’s equal to two weeks of current imports. Still we require more such capacities to be built as a 60 days reserve will serve as a decent cushion considering India’s dependence on oil imports. I would also like to stress on the point that these reserves will help in times of such geopolitical issues where supply could be interrupted.

The other serious issue which needs to be addressed is the liquidity part. The oil imports suck out the liquidity in the Indian markets, as to buy oil the oil companies have to pay in dollars which they get in exchange of rupees. Consider the present situation of our banking system, we are somewhere in the negative Rs.80000 Cr to Rs.1 lakh crore when it comes to liquidity on a daily basis. Imagine what impact huge oil imports will have on this present state, the imports will not only be very expensive but the call rates, volumes in the LAF window and bond yields will jump significantly in order to fund the oil companies. The solution to this is open for discussions as I have no clue at the moment.

The only suggestion I have is that oil companies should not buy oil from the spot market so frequently and should book commodity futures/forwards in the international market (which they are allowed to book with a bank) and hedge the currency risk with a forward (again this is allowed to them with a bank). I have been told by many bankers that corporate usually don’t book oil forwards forget hedging the exchange risk by booking usd/inr forwards. The reason which they usually give is what if the crude prices fall in future and we would have locked in a higher rate.

One can just hope that someday sensibility will prevail.