The Reserve Bank of India (RBI) has given its nod to Indian residents to hedge their exposure to gold on recognised exchanges in the International Financial Services Centre (IFSC) at GIFT City, Gujarat.
“Resident entities in India are currently not permitted to hedge their exposure to gold price risk in overseas markets. With a view to providing greater flexibility to these entities to hedge the price risk of their gold exposures efficiently, it has been decided to permit resident entities to hedge their gold price risk on recognised exchanges in the IFSC,” said a note put out by RBI on Wednesday.
This move is expected to benefit importers and exporters of gold such as jewellers and industries that use gold as an intermediate or raw material. The apex bank will issue detailed guidelines on the measure separately.
“Jewellers and industry players who import and export gold are exposed to price risk as well as currency movement risk when they hedge on platforms such as MCX. Allowing hedging at IFSC will help mitigate these risks,” said Ravindra Rao, CMT, EPAT, VP – head commodity research, Kotak Securities.
Hedging in commodity price requires liquid pricing benchmarks and an internationally-relevant benchmark. Most base metal benchmarks with largest volumes are those on the London Metal Exchange and the New York Mercantile Exchange, according to experts.
“Indian importers and exporters of gold as well as Indian producers of jewellery sourcing gold locally needed to access international hedging markets for protection against price risk. The exchanges in IFSC have tied up with the London Bullion Market Association and the Dubai Gold & Commodities Exchange for using benchmark prices for settlement of futures contracts. One can access these products subject to the exchanges’ hedging policy. It should make sourcing of yellow metal more price-efficient, thereby making Indian industry more competitive in global markets,” said Sunil Gidwani, partner, Nangia Andersen.
Hedging includes undertaking a derivative transaction to reduce an identifiable and measurable risk. Hedging of gold price risk is currently not permitted under the hedging of commodity price risk and freight risk in overseas markets directions of the RBI.
“Hedging of gold price risks will benefit businesses which have direct exposure and/or indirect exposure to gold. Though the devil will be in the details, hedging will facilitate businesses to freeze the prices of gold vis-a-vis market fluctuations and be more competitive. This will give Indian jewellery industry and the IFSC a big push. The hedging transaction costs in IFSC would need to be internationally competitive,” said Yashesh Ashar, partner, Bhuta Shah & Co.