The Hindu Business Line : RBI mulls blanket approval to cos for commodity hedging

THE Reserve Bank of India is understood to be considering a proposal to grant blanket approval to Indian companies having exposure in commodities to freely hedge in the international exchanges.

Currently, companies do take permission on a case-to-case basis from the RBI to hedge their price risk in overseas exchanges. Over 100 firms including Hindalco and Sterlite have been taking cover in the overseas exchanges.

Of late, the list of companies requesting for this facility is said to be mounting.

"We have requested the RBI to allow a blanket permit for commodity hedging in the international exchanges," said an official from a big metal producer.

"If RBI does give blanket permission for commodity hedging, it will definitely increase volume of this activity. Also, old players will be more comfortable with less paper work.

Number of new players may also increase," Mr Bhargav Vaidya, a leading consultant told Business Line.

The international exchanges such as the London Metal Exchange, Chicago Board of Trade are preferred over the nascent domestic ones — the Multi-Commodity Exchange of India , the National Multi-Commodity Exchange (NMCE) and the National Commodity and Derivatives Exchange — due to the market depth, diversity of instruments and lesser counter-party risk that they offer, said an analyst.

There are opponents to the same too. Said Mr P.H. Ravikumar, Managing Director and Chief Executive Officer (CEO) of NCDEX, "It is a funny situation. RBI is thinking of this at the time when the national commodity exchanges in the country are quite capable. Only if they were incapable should one have to hedge the risk in the international exchanges."

RBI needs to explain why banks are permitted to hedge in the international exchanges but not in the domestic exchanges. RBI should allow banks to hedge in the domestic ones too," he said.

At present, many big corporates have been given permission to undertake hedging transactions in the international commodity exchanges to hedge their commodity price risk on import/export.

Interestingly, Reliance Industries is understood to be interested in hedging even its freight rates in international exchanges since the domestic ones do not offer such a product.

Change in freight rates has a considerable impact on the company's margins while transporting petrochemicals from its refinery in Jamnagar, Gujarat, an industry source said. Many key sectors such as gold jewellery units, airlines companies, oils and petroleum products, car manufacturers and white goods manufacturers are expected to be benefited with this permission.

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