This was the major point of discussion at the seminar on hedging and `futures contracts' of commodity trading in petroleum products, organised in Mumbai on Wednesday by Independent Power Producers Association of India (IPPAI). Speaking at the seminar, eMecklai CEO Jamal Mecklai said: "The Indian economy has been deregulated to the point where we no longer have the luxury of moving slowly."

He said that the higher volatility in both oil prices and the rupee has hit the economy hard, and added that hedging could have helped the Indian economy and oil companies. Mr Mecklai pointed out that in 1998, Indian companies were permitted to hedge price risk on international exchanges in all commodities excluding oil.

"Oil prices were sharp and fell to a low of arround $11 a barrel in February 1999. If Indian companies had been permitted to hedge at that time, the savings in India's oil bills for the April-June quarter would have been more than $2.5 billion," Mr Mecklai said. The drop in RBI's reserves during the same quarter - when the rupee came under pressure and RBI was selling dollars -- was $2.3 billion. "Clearly, if oil hedging had been permitted the pressure on the rupee would have been lower, and interest rates would not have been hiked," Mr Mecklai said. He suggested that company boards must set down quantitative risk limits for the management.

Speaking at the seminar, Mr Sandeep Kohli of Dhabol Power said "the use of derivative products will enable better price risk management", adding that the role of risk management is important as the issue here was the `volatility' of the liquid fuel prices rather than price itself.

Mr Kohli pointed out that the recent price hike indicates a movement towards international price parity. High prices and volatility in fuel prices have created a need for risk mitigations.

He emphasised that hedging was a tool against price rise and volatility, and urged decision makers to make discreet use of it. Mr Kohli said that the role of risk managers will gain importance especially among IIPs.

Kohli was of the opinion that futures contracts in petroleum will introduce a price assurance into a world of uncertainty and will be handy for price discovery and gauging market sentiments. "This product helps in managing price risk and is designed to add predictability to an IIP's business and lower costs", Mr Kohli said. Mr Kohli said tools to mitigate volatility exists. Flexibility in sourcing liquid fuel, cutting red tapism and removing regulatory hurdles would make liquid fuel attractive to power producers, he said.