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Case Study

IOCL: HEDGING STRATEGIES AMIDST VOLATILE INDIAN RUPEE

Mr Ujjawal Sawarn, Ph.D. Scholar, Indian Institute of Management Raipur & Dr. Rashmi Shukla, Asst. Professor,Indian Institute of Management Raipur. .
Hedging, Volatile market,oil& Gas sector,IOCL, mitigate risk , sustained growth, profitability, financial risks

Abstract: This case highlights the hedging strategies devised by Indian Oil Corporation Limited (IOCL) of India during the volatile Indian Rupee in 2018-19. Indian economy observed a rising Current Account Deficit (CAD) in 2018-19 because of (a) revival of oil prices in 2018 after a steep slump in 2014 , (b) large volume imports of Gold and (c) slowdown in industrial production due to slackening of domestic demand . This rising CAD and large foreign capital outflow led to depreciation of the rupee against the dollar . Currency volatility of similar nature was observed in other developing nations as well .

This steep depreciation with significant volatility badly hurts many Indian Import-oriented firms while Export-based sectors such as IT & ITES, pharma companies posted remarkable profits . Indian oil-importing firms were the largest traders of 'rupees for dollar' because all their oil import need dollars for payments. These companies also need significant working capital for their routine operations, which they can now finance through External Commercial Borrowings (ECBs) . Therefore, they are exposed to multiple channels of currency risks.

IOCL reported a Rs 45 billion loss in 2018-19 compared to the previous year due to a lower inventory gain (fall of 25 billion than the previous year) and a foreign exchange loss of Rs 15 billion . Being the second-largest player in both the petrochemicals market and natural gas segment in India and having operations in more than eight different countries with revenues in the order of Rs. 6000 billion per annum , IOCL must carefully strategize for current and future hedging scenarios. At IOCL, a team with key responsibilities has been asked to suggest the possible way forward for the Indian rupee and devise a strategy during such volatile times.

Learning objectives :

• To understand the company level (a) channels of currency risk exposures. (b) strategies of currency risk mitigations

• To illustrate the mechanism of devising a hedging policy using financial derivatives for mitigating currency risk exposure.

  • Pub Date:
    22 Sep 2021
  • Source:
    1st Case Competition 2021
  • Discipline:
    Strategic Management,Financial Management,Customer Relationship Management
  • Product#:
    1656
  • Keywords:
    Hedging, Volatile market,oil& Gas sector,IOCL, mitigate risk , sustained growth, profitability, financial risks
  • Length:
    Pdf : 13 page(s) ,

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