The Hindu Business Line : Metal SMEs allowed to hedge risk in global exchanges

The RBI has also allowed actual users of aviation turbine fuel (ATF) to hedge their economic exposures in the international commodity exchanges based on their domestic purchase.

Mumbai April 25 In a major boost to small and medium metal companies, the Reserve Bank of India has allowed domestic producers and industrial users of base metals such as aluminium, copper, lead, nickel and zinc to hedge their price risk in international exchanges, such as the London Metal Exchange (LME).This will be based on their underlying economic exposure.

Earlier, those with genuine underlying exposure were allowed, but the facility was restricted to exporters and importers.

Others were not allowed to hedge in international exchanges.

The move comes at a time when the Indian commodity futures exchanges are registering huge turnover on metals.

"The RBI has received representation from domestic producers and users of certain metals for permission to hedge the price risk on domestic purchases and sale in international exchanges in order to take advantage of greater depth and liquidity in such exchanges," the RBI report said.

"It will be interesting to see how many domestic companies will be interested in tapping international markets, as they have an Indian market which has 98 per cent co-relation with international prices," said Mr Joseph Massey, Joint Managing Director of MCX, which records the maximum volumes in metals futures trading.

Advantage

"The main advantage for us is that trading happens in Indian currency and our exchanges are open till the foreign exchange closes. The RBI should also consider opening the doors for foreign investments in Indian commodity exchanges. The biggest challenge for Indian companies would be access to authorised brokers."

The RBI has also allowed actual users of aviation turbine fuel (ATF) to hedge their economic exposures in the international commodity exchanges based on their domestic purchase.

Apart from domestic producers and users, players such as traders and trading houses who are exposed to systemic international price risk and are keen on hedging their risk in international exchanges can seek permission from the RBI through authorised dealer banks, the Credit Policy said.

Enhanced limits

The Central bank has enhanced the eligible limits of exporters and imports for booking forward contracts from 50 per cent to 75 per cent.

Importers and exporters of goods and services are now permitted to book forward contracts on the basis of a declaration of exposure and past performance.

Contracts booked in excess of 50 per cent (now raised to 75 per cent) of eligible limits have to be on deliverable basis and cannot be cancelled.

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