RBI to review foreign commodity hedging framework

A working group of members from RBI, Sebi and a few external experts will do the review

The Reserve Bank of India (RBI) has proposed a review of the existing framework for hedging of commodity price risk in markets abroad.

A working group of members from RBI, the Securities and Exchange Board of India, and a few external experts will do the review, RBI said on Thursday.

“Exposure of Indian entities to commodity price risks has been accentuated by the growing integration of the Indian economy with the rest of the world and increasing cross-border trade,” the central bank noted.

It added that in a fundamental shift in foreign exchange market regulations, greater leeway was being proposed for residents to maintain open positions. The permissible limits for hedging in the over the counter and exchange-traded markets were also being rationalised, it said.

A number of Indian entities have been importing commodities for both captive consumption and trading, with a ceiling on the quantity and value fixed by RBI.  

India imports base metals, precious metals and many agricultural commodities, including pulses and edible oils, with and without adequate hedging on global commodity exchanges.

“Importers require RBI’s permission for hedging, based on their record for the past three years. Sometimes, they import commodities in large volumes in the physical market and simultaneously take buy positions in overseas futures markets, thereby doubling their price volatility risk. Instead of a ‘buy position’ (long), the importer requires to take a ‘sell position’ (short) to complete the hedging risk. The working group might look into importers' current problems in hedging,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

It might also allow domestic traders who procure from an existing importer to directly hedge their risk in global exchanges, rather than wait for suppliers to take such risks. In this case, more entities would be allowed to hedge their commodity risk in the global exchanges, added Thiagarajan.