The Reserve Bank of India (RBI) has permitted the country's banks to issue guarantees or standby letters of credit (L/Cs) to support payment obligations for commodity derivative deals overseas.

The move has been hailed as a good move in the context of the global financial crisis. This is because if importers of oil and metals in particular can provide L/Cs instead of cash in derivatives deals, this will alleviate pressure on the country's hard-pressed foreign exchange reserves.

Changes

Up until this latest RBI ruling, banks could only remit cash funds towards payment obligations of commodity importers for their derivative transactions overseas.

Now India's central bank says guarantees and L/Cs can be issued against approved commodity-hedging activities of companies, but only for the payment of margin money.

Reserve benefits

The move aims to ease the burden of India's foreign exchange reserves by deferring the outflow of funds from India to the time of settlement of commodity derivative transactions.

One anticipated result of the move is that India's oil refiners will no longer have to look to foreign exchange for funding at a time when US dollars are hard to come by.

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