Export of pulses freed; traders say it’s of no help
City: New Delhi
RBI has allowed domestic banks and their subsidiaries active in capital markets to offer commodity hedging facilities to Indian entities abroad. This will open a new line of business for the Indian banks while enhancing liquidity in commodity hedging overseas.
The banks will be initially allowed to offer commodity hedging to their constituents on a back-to-back basis, on both over-the counter markets and exchanges, including on domestic exchanges. Later, when required risk management capability has been acquired, banks will be allowed to run a book in commodity derivatives. However, for that there will be an umbrella limit of 20 per cent of Net Owned Fund applicable for investment in equities, venture capital funds (VCFs) and equity linked mutual funds.
Towards this, RBI may consider the necessary legal changes in the Banking Regulations Act, 1949. A working group constituted by the RBI also recommended that residents who hedge their commodity price risk in overseas market should be encouraged to partly and progressively hedge their risks on the domestic exchanges.
“This is going to open up a huge business for banks. They would act as counterparty and in turn allowed to run their own books. For the hedging entities, this will increase the liquidity and depth of the markets. Till now only large companies have been hedging their commodity risk in exchanges like LME or in the OTC markets as it was expensive. The involvement of Indian banks will also see more participation by smaller entities,’ said Himanshu Gupta, chief market strategist, Karvy Comtrade.
“Clearly, there is a need for opening up the commodity hedging for a wider range of commodities. Besides, too much reliance on case-by-case approvals does not augur too well for efficient and timely hedging, which highlights the need for a more liberalised regulatory dispensation,’ RBI observed.
RBI recommended a uniform approach in extending facilities to hedge commodity price risk in overseas markets that is agnostic to the place of procurement of the commodity, by doing away with the differences in treatment of importer/exporter and domestic buyers/sellers. It also made a “positive list’ of commodities that can be hedged, adding a few more items, including crude oil derivatives, coffee, soya complex, tin and cocoa.
Removing the earlier financial limits for hedging, it has allowed hedging of inventory to the extent of the average inventory maintained by the entity. It also allowed price fix hedging in addition to offset hedging to entities faced with a variable price on input or output, but not both.
While recommending hedging in overseas commodity exchanges due to transparency in pricing, RBI allowed OTC market hedging with regulated entities, preferably banks, as counterparties. However, hedging of only direct commodity price risk may be allowed for now. It noted that hedging by domestic buyers/sellers of the currency risk resulting from their overseas commodity hedging may be permitted as it will enable complete hedging of international commodity price risk.
In domestic sale/purchase of commodities in the positive list, unlisted entities may be permitted to hedge commodity risk overseas with the dealer bank’s approval. If and when the banks are permitted by RBI to deal in commodity derivatives, unlisted entities may hedge with the banks.
Source:- Mydigitalfc.com
