Skip to main content

What are guidelines on hedging risks in overseas markets?

Reserve Bank of India (RBI) has released guidelines on hedging of commodity price risk and freight risk in overseas markets.

What is hedging?

Hedging is the activity of undertaking a derivative transaction to reduce an identifiable and measurable risk. 

What is commodity price risk and freight risk?

  • Commodity price risk is the financial risk arising from fluctuations in the prices of commodities.
  • Freight risk is the financial risk arising from fluctuations in the freight charges.

Which entities are eligible for hedging commodity price risk and freight risk?

Residents other than individuals are eligible to hedge commodity price risk and freight risk through Authorised Dealer Category-I Banks.

How is exposure to commodity price risk and freight risk defined?

  • An eligible entity is said to have direct exposure to commodity price risk if –
    • It purchases / sells a commodity (in India or abroad) whose price is fixed by reference to an international benchmark; or
    • It purchases / sells a product (in India or abroad) which contains a commodity and the price of the product is linked to an international benchmark of the commodity.
  • An eligible entity is said to have indirect exposure to commodity price risk if it purchases / sells a product (in India or abroad) which contains the commodity and the price of the product is not linked to an international benchmark of the commodity.
  • An eligible entity is said to have exposure to freight risk if it is engaged in the business of refining oil or is engaged in the business of shipping.

Which commodities are eligible for hedging?

Commodities whose price risk may be hedged are –

  • In case of direct exposures to commodity price risk – All commodities (except Gems and Precious stones). 
  • In case of indirect exposures to commodity price risk – Aluminium, Copper, Lead, Zinc, Nickel, and Tin.

Which products are permitted for hedging?

Following products are permitted for hedging commodity price risk and freight risk –

  • Generic Products –
    • Futures and forwards
    • Vanilla options (call option and put option)
    • Swaps
  • Structured Products – 
    • Products which are combination of either cash instrument and one or more generic products
    • Products which are combination of two or more generic products

Structured products may be permitted to eligible entities who are –

  1. Listed on recognized domestic stock exchanges or 
  2. Fully owned subsidiaries of such entities or 
  3. Unlisted entities whose net worth is higher than INR 200 crore

How can commodity price risk and freight risk be hedged?

  • Eligible entities having exposure to commodity price risk for any eligible commodity may hedge such exposure in overseas markets using any of the permitted products.
  • Eligible entities having exposure to price risk of gold may hedge such exposure in the International Financial Services Centre (IFSC).
  • Eligible entities having exposure to freight risk may hedge such exposure in overseas markets by using any of the permitted products.

What are other guidelines for hedging transactions?

  • Banks are permitted to issue Standby Letters of Credit (SBLC) / Guarantees, for a maximum period of one year, on behalf of their clients in lieu of making a remittance of margin money for commodity hedging transactions entered into by their customers. 
  • Realisation and repatriation of foreign exchange due or accruing to an eligible entity resulting from permitted transactions shall be guided by the provisions of the Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015.
  • Banks shall submit a quarterly report to the Financial Markets Regulation Department, Reserve Bank of India (RBI) through Centralised Information Management System (CIMS). In case of no transactions, a “Nil” report shall be submitted by the bank.

What is the recent update in the guidelines?

(Updated on April 15, 2024)

Resident entities were permitted to hedge their exposure to price risk of gold on exchanges in the IFSC recognised by the International Financial Services Centres Authority (IFSCA). Resident entities have now been permitted to hedge their exposures to price risk of gold using over-the-counter (OTC) derivatives in the IFSC in addition to the derivatives on the exchanges in the IFSC.

What are the reporting requirements?

(Updated on December 27, 2024)

  • Banks shall report all OTC transactions in gold derivatives undertaken by them in domestic markets, IFSC and outside India to the trade repository (TR) of Clearing Corporation of India Ltd. (CCIL) with effect from February 01, 2025.
  • Banks shall report all OTC transactions in gold derivatives undertaken by their eligible customers / constituents in domestic markets and IFSC to the TR with effect from February 01, 2025.
  • Banks shall report all the aforesaid transactions undertaken by them or their eligible customers / constituents to the TR before 12:00 noon of the following business day.
  • As a one-time measure, banks shall report all matured and outstanding OTC transactions in gold derivatives undertaken by them in the domestic markets, IFSC and outside India and transactions undertaken by their eligible customers / constituents in domestic markets and IFSC from April 15, 2024 to the TR by February 28, 2025.


References

Reserve Bank of India. (2022, December 12). 'Hedging of Gold Price Risk in Overseas Markets'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12423&Mode=0

Reserve Bank of India. (2022, December 12). 'Master Direction – Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022 (Updated as on April 15, 2024)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12427

Reserve Bank of India. (2024, April 15). 'Hedging of Gold Price Risk in Overseas Markets'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12662&Mode=0

Reserve Bank of India. (2024, December 27). 'Reporting Platform for transactions undertaken to hedge price risk of gold'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12757&Mode=0


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Credit Facilities – Digital Lending Guidelines

Reserve Bank of India (RBI) has issued directions on credit facilities offered by various regulated entities. This article summarises the directions applicable to digital lending. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) All India Financial Institutions (AIFIs) regulated by RBI – Export Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) National Housing Bank (NHB) Small Industries Development Bank of India (SIDBI) National Bank for Financing Infrastructure and Development (NaBFID) Non-Banking Financial Companies (NBFCs) for all layers – Deposit taking NBFC (NBFC-D) NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro...
Post a Comment
Read more

Credit Facilities – Lending against Gold and Silver Collateral

Reserve Bank of India (RBI) has issued directions on credit facilities offered by various regulated entities. This article summarises the directions applicable to lending against gold and silver collateral. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) Non-Banking Financial Companies (NBFCs) for all layers – Deposit taking NBFC (NBFC-D) NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  NBFC-Infrastructure Finance Company (NBFC-IFC)  Infrastructure Debt Fund-NBFC (IDF-NBFC)  Housing Finance Company (HFC)  To whom are the directions partially applicable? The prudential regulations are not applicable to ‘NBFCs-B...
Post a Comment
Read more

Guidelines on Money Changing Activities (Updated as on May 06, 2026)

Reserve Bank of India (RBI) has updated the guidelines on money changing activities. What are the guidelines for appointment of agents / franchisee? RBI had permitted Authorised Dealers (ADs) Category - I, ADs Category - II and Full Fledged Money Changers (FFMCs) to enter into agency or franchisee agreements at their option for the purpose of carrying restricted money changing business i.e. conversion of foreign currency notes, coins or travellers' cheques into Indian Rupees (INR).  A franchisee can be any entity which has a place of business and a minimum Net Owned Funds of ₹10 lakh.  Franchisees can undertake only restricted money changing business. Franchisees of AD Category - I / AD Category - II / FFMCs functioning within 10 kms from the borders of Pakistan and Bangladesh may also sell the currency of the bordering country, with the prior approval of RBI.  Other franchisees of AD Category - I / AD Category - II / FFMCs cannot sell foreign currency. An authorised pers...
Post a Comment
Read more

Credit Facilities – Finance to Non-Banking Financial Companies (NBFCs)

Reserve Bank of India (RBI) has issued directions on credit facilities offered by various regulated entities. This article summarises the directions applicable in respect of finance to Non-Banking Financial Companies (NBFCs). To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Primary (Urban) Co-operative Banks (UCBs) All India Financial Institutions (AIFIs) regulated by RBI – Export Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) National Housing Bank (NHB) Small Industries Development Bank of India (SIDBI) National Bank for Financing Infrastructure and Development (NaBFID) What are the conditions on finance to NBFCs? Commercial Banks and SFBs The bank shall extend need based working capital facilities as well as term loans to NBFCs registered with the RBI and engaged in infrastructure financing, equipment leasing, hire-purchase, l...
Post a Comment
Read more

Regulations for Authorised Persons

Reserve Bank of India (RBI) has issued a revised framework for authorisation of any person as an Authorised Person under the Foreign Exchange Management Act (FEMA), 1999. Who can act as an Authorised Person? No person shall act as an authorised person without obtaining an authorisation from the RBI. A person seeking authorisation as an authorised person may apply to the RBI through the PRAVAAH portal (https://pravaah.rbi.org.in) to the regional office concerned of the RBI under whose jurisdiction the registered office of the applicant is established. RBI shall consider applications for fresh authorisation under 3 categories, namely, Authorised Dealer (AD) Category-I, AD Category-II and AD Category-III. Which entities are eligible to act as an Authorised Person? Category Eligible entities AD Category-I A bank licensed by the RBI. AD Category-II A bank licensed by the RBI or a Non-Banking Financial Company (NBFC) registered with the RB...
Post a Comment
Read more