RBI releases draft directions on hedging of commodity price

The Reserve Bank has proposed delegating to clients the decisions regarding the quality and tenor on hedging of commodity prices and freight risk.
In its draft directions on the subject, the RBI has also proposed introducing the facility for hedging of indirect price risk for selected metals.
Hedging refers to activity undertaken to reduce an identifiable and measurable risk.
"Eligible entities having exposure to commodity price risk for any eligible commodity may hedge such exposure in overseas markets using any of the permitted instruments," the draft said.
The Reserve Bank of India (RBI) has invited comments on the draft directions from banks, market participants and other interested parties by January 31.

It further said that structured derivatives may be permitted to eligible entities who are listed on recognised domestic stock exchanges and fully owned subsidiaries thereof or entities whose net worth is higher than Rs 200 crore, subject to certain conditions.
"All payments/receipts related to hedging of exposure to commodity price risk and freight risk shall be routed through a special account with the bank for this purpose," it said.
The draft directions have also proposed that the bank should keep on its records full details of all hedge transactions and related remittances made by the entity for this purpose.