Foreign hedgers allowed to enter commodity futures, banks may have to wait

Sources say RBI not willing to allow banks till the Forward Contract Regulation Act is amended

The Reserve Bank of India (RBI), it is learnt, favours allowing foreign companies and traders to hedge their commodity risk on futures exchanges.

Some of the exchanges have been asking for this. There are some big multinational entities — examples are Cargill and Glencore — which have big trading interests in Indian commodities. They export wheat, sugar, guar gum and maize, while importing edible oils and other commodities. However, they’re not able to fully hedge their risk, though all of them have outfits registered in India.

Once allowed, they will be in a position to do this and lock prices at the hedged levels on futures exchanges for their Indian business.

The idea is that in several commodities, India has been among the top global producers or consumers but prices of those commodities are determined in markets abroad, despite India’s strong interest. An exchange official said: “If allowed, the price discovery in commodities where India is a significant producer or consumer could shift to India.”

Sources said Ramesh Abhishek, chairman of the Forward Markets Commission, had raised the issue at a recent meeting of Financial Stability and Development Council. He is understood to have said banks should ask borrowers which deal in commodities as producers or users to hedge their commodity price risk on the futures platform.

FMC officials had held discussion with RBI and both agreed to first allow foreign hedgers on Indian derivative market. However, agreement could not be reached on allowing banks to enter commodities derivatives. RBI wanted that this be allowed only after the Forward Contracts Regulation Act was amended to give more powers to regulator and permit options trading in commodities.