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Suresh P. Iyengar

Mumbai, Oct 17 Given the volatility of the rupee against the dollar, metal companies have now begun to hedge their risks in the commodity market here, though it accounts for a fraction of what they put in on international exchanges.

The trend is reflected in the increase of open interest in the base metals such as copper, nickel and zinc.

“With ample liquidity, hedging on the commodity exchanges not only covers the currency risk, but also the price co-relation which is almost 97 per cent in the metal segment,” said Mr Joseph Massey, Deputy Managing Director, MCX.

“Among the big corporates, Essar, Binani Zinc, Hindustan Copper, Indian Oil, JMW and Polycab Wires are a few who are using our exchange directly or through brokers to hedge their risks,” he added.

Open interest in nickel on MCX has gone up from 923 tonnes in June to 1971 tonnes in August. Zinc open interest went up from 31,839 tonnes in June to 38,188 tonnes in August, while copper was up from 14,150 tonnes to 14,508 tonnes in August.

On NCDEX, copper futures turnover jumped from Rs 379 crore in June to Rs 942 crore in August. The open interest was also attributed to global developments.

There appears to be increasing interest to up the activity on the Indian exchanges but hurdles remain. “At present, the contracts are liquid but when more business move to India, the markets might not have enough strength to carry our risk. Moreover, the contract size needs to be bigger for us to shift more business,” said a CEO of a metal company, which trades on MCX.

Mr Massey said the exchange now had at least gained the confidence of companies. But, changes had to be made at the exchange and policy level before the leap into the second stage.

The Reserve Bank of India recently allowed small metal companies with no underlying exposure abroad to hedge their risks on the international commodity markets. Participation of banks, mutual funds, financial institutions and foreign investors are not allowed to invest in the commodity markets.

“In the equities market an investor can offset his losses against gains made and capital gains tax is charged only on the net profit. Some such incentives would go a long way in attracting corporates to hedge on the local exchanges,” said Mr Massey.

Cost of hedging on the international markets is much higher as companies have to pay brokerage, bank cost and forex cover. Unlike big corporates for whom the multi-national banks provide forex and double up as brokers taking up positions, the small companies are on their own.

With the annualised forex volatility moving up from 4.65 per cent during 2006 and logging 5.61 per cent, as of September 2007, Indian commodity markets have become a safer bet, said Mr V. Shunmugam, Chief Economist, MCX.

More Stories on : Commodity Exchanges | Metals | Forex

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Rupee volatility: Metal cos take to Indian exchanges for hedging

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