'Firms can hedge on foreign comexes'

The Reserve Bank of India (RBI) on Tuesday reiterated that Indian companies having exposure to price risks in metals, crude oil, and shipping business could hedge on foreign commodity exchanges.

“A resident in India, who has a commodity exposure and faces risks due to volatile commodity prices, can hedge ...using hedging products, such as futures and options, which are exchange-traded and over the counter (OTC) derivatives as permitted by RBI from time to time,” the central bank said.

The hedging operations could be performed via two routes— the authorised dealers’ delegated route, and the RBI approval route.

The oil and shipping companies are permitted to hedge through the delegated route, that is, through AD Category I banks and other corporates having freight exposures are permitted to hedge after obtaining prior RBI approval.

Oil marketing companies can hedge up to 50 per cent of the volumes in the quarter preceding the previous quarter.

Domestic users of aviation turbine fuel are also permitted to hedge on foreign bourses or over-the-counter markets.

Hedging will also be allowed in imports, exports, or domestic purchases of aluminium, copper, lead, nickel, and zinc under the delegated route. .

SEZ companies
Entities in special economic zones (SEZs), intending to hedge risks on foreign bourses, need not take a separate approval from RBI.

However, the entity must be completely isolated from financial contacts with its parent or subsidiary in the mainland or within the SEZ as far as import or export transactions were concerned, RBI clarified.

Freight hedging
Large warehouses, ship owners, and oil refiners and marketing companies have substantial overheads on account of freight component, such as dry bulk carrying rates and oil tanker rates. These companies could use freight derivatives to manage risk and hedge against price volatility in the supply chain, RBI said.