Empowering Gold Traders: RBI’s New Directive on Hedging Strategies in Overseas Markets
Introduction
The Reserve Bank of India, vide its notification[1] dated 15th April 2024 has eased its rules for allowing entities which are resident of India to hedge their exposure towards the price risk of gold by utilising the Price Risk Derivatives under the International Financial Services Centre along with its derivatives under the IFSC exchange system.
According to the directive issued by the Reserve Bank of India (RBI) in December 2022, a restriction had been imposed upon the Indian entities from managing their gold price risks directly through the exchange organizations governed or controlled by the International Financial Services Centre (IFSC). However, with the influx of time, a need to increase flexibility was realized by the Central Bank along with various other commercial banks and other stakeholders of the society which led to the issuance of the present notification which has presently granted authority and legitimacy to the process of “over – the – counter” or OTC derivatives as an additional tool for hedging the gold price risks in the overseas markets.
The process of “OTC” or “Over – the – Counter” derivatives involves a financial contract whose trade does not take place through the exchange of assets but can be modified and tailored according to the customized needs of the parties to the contract. Additionally, the process of hedging refers to the reduction or mitigation of financial risks in the market caused due to adverse fluctuation of prices of assets in the economy. Such a process entails taking a financial position wherein the stance taken towards one asset is completely opposite to the other asset in such a manner that the potential losses arising from one transaction get mitigated through the other.
Provisions of the Notification
“Gold Hedging”, as the term suggests, refers to the process, especially in the gold industry wherein various strategies are employed as a measure to minimise the risks associated with gold trading usually due to potentially fluctuating nature of the market and volatility in the prices.Therefore, this process has assumed vital importance among gold traders and business houses to protect themselves from potential losses.
According to the policy decision of the RBI which has come into effect immediately, the resident entities have been allowed to utilise the over – the – counter mechanism and its derivatives along with the simultaneous utilisation of derivatives in the International Financial Services Centre for mitigating their risks in gold investment which would not only increase business security but would also offer increased options and channels for regulating the risks involved in gold investment across the market. Additionally, in response to the exponentially growing rates of gold in the markets due to rising geo – political tensions in the middle – eastern nations, due to which the rates of gold are expected to surpass $2700 per ounce this year, such measures are also necessary to secure investor trust and stability of the market at large in order to prevent the entire framework of gold trade from crashing.
The present notification of the Reserve Bank of India has also amended and altered various other circulars of the RBI and the International Financial Services Centre such as Master Directions – Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Market), Directions 2022 and A.P Circular No. 19 dated December 12, 2022.
Conclusion
The present step of the Reserve Bank of India is a welcomed step towards ensuring stability in the gold trading market and ensuring that the traders and investors’ confidence in the market does not diminish due to market volatility. Additionally, due to numerous geo – political factors which have caused an exponential upsurge in the prices of gold, this notification has acted as a relief towards providing increased and better alternatives for investment in the sector. Additionally, such liberalization would also promote an increased number of national and international trade and investments in gold, further leading to better economic growth in the country.
However, considering the newly introduced provisions of gold hedging, it is also expected that the Indian jewellery industry would be benefitted since the traders would be effectively able to manage their exposure towards risks and losses.
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12662&Mode=0
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